My understanding is that 60/40 stock/bond portfolio relies on there being a negative correlation between equities and bond prices.

But does the success of this portfolio presume a low interest rate environment?

I searched and couldn't find information on the origin of this particular allocation. Maybe that includes clues on the assumptions underlying it.

  • 60/40 is a simplified starting point. As you get farther into this you'll want to distinguish between large-cap stocks, small-cap stocks, income-producing investments like REITs, and you may want some percentage invested in stocks in other countries.
    – keshlam
    Dec 15, 2022 at 2:46
  • The 60/40 portfolio didn't work with the inflation spike that ended the low interest rate environment. Well, a 60/40 portfolio with three to six month bond duration would have been okay.
    – S Spring
    Dec 15, 2022 at 22:56

2 Answers 2


As you said, the 60/40 portfolio "works" because of the historically poor correlation between stocks and bonds. I use quotes around works because it works insomuch as it addresses a well-documented behavioral bias: that investors at large are more fearful than greedy and thus are willing to give up upside in exchange for lower volatility (this is why sharpe and sortino ratios are marketed rather than risk-of-ruin metrics for example). The idea is that when the driver of returns flounders, the resilient portion of the portfolio will offset some losses, smoothing out returns.

This construction and its logic has been challenged as of late since prior to the last two years, bonds had been on a huge bull run-- rates fell from 16% to near zero! So if you believe:

  1. bonds are in the portfolio to offset losses from stocks
  2. long-term stocks returns are primarily a function of the economy and
  3. during economic downturns rates are generally cut to encourage consumption

Then when rates are already at zero, there is little room to cut and thus little room for passive investments in bonds to generate a positive return to offset stock losses. It is an even worse scenario for the portfolio if rates are actually being increased, as they are today. If you believe in active management, then you can find some bond managers who might be able to outperform, but since rate trends are the single biggest driver of debt returns, the debt market at large will not be able to offer significant upside in stock market downturns to justify their positions in the portfolio.

We are seeing this this year where for instance the return on SPY (S&P 500 ETF) is -13% while the return on AGG (US Aggregate Bond ETF) is -12% YTD thru 11/30 (12/31/2021-11/30/2022)--the aforementioned negative correlation is broken!

Compare that to the last time equities performed this badly over a calendar year. Most recently that was in 2008, when AGG was up 7% offsetting a 36% loss in SPY. The time before that was in 2001 and 2002 where AGG was up 8 and 10% respectively, offsetting losses in SPY of 11% and 22%. In both those cases, rates fell by more than 4+%.

So to summarize, the portfolio only "works" if normal monetary policy is taking place (e.g. rates don't stay at zero for multiple years despite record GDP, corporate profits, and, although a flawed metric, low unemployment). Bonds need room to run if stocks falter, and that can only reliably happen in passive debt markets when rates have room to be slashed.

Where we are now, where rates are actually being raised into what is largely forecasted to be a mild recession? One is likely better off buying puts on something like 1/5th the notional of an equity-only portfolio to get a similar risk/return profile as the historical 60/40 portfolio offered.

  • >buying puts on something like 1/5th the notional of an equity-only portfolio to get a similar risk/return profile This part intrigued means. How would know that portfolio has reached a similar risk/return profile? Any specific metric? Feb 7 at 4:04

Any financial advice that contains 'crystal clear' numbers should be taken as a suggested 'rule of that thumb' from that particular source. And just because a rule of thumb is commonly touted, doesn't mean it is universally accepted or accurate.

So I flip it back to you:

"Does the 70/30 bond / equity portfolio assume a low interest rate?"

"Does the 20/80 bond / equity portfolio assume a low interest rate?"

There are many similar guidelines that say different things from eachother. None are omniscient, and even ones that may have value, cannot apply in all circumstances. That is: interest rates will typically increase the value of a bond and decrease the value of an equity [all-else being equal]. Whether that means you should adjust your debt-equity mix in your own personal portfolio when interest rates rise as they have this year, is far too complex and opinionated to get a straight answer without really narrowing the scope of the situation.

  • 1
    "interest rates will typically increase the value of a bond" -- is this usual presumption? Bond yields increase with interest rates, but not prices. Dec 14, 2022 at 20:20
  • @StatsScared Yields drive prices. Assume one bond has a 5% yield, and another bond has a 3% yield. Which one would you pay more to own? [Note for clarity - if you own a bond portfolio today, and tomorrow interest rates rise, then currently held bonds, which have yesterday's lower interest rates will drop in value compared to what they were worth yesterday]. Dec 14, 2022 at 20:25
  • 2
    But the 80/20 rule is about bonds you current own, not about bonds you can purchase after a rate increase/decrease. Dec 14, 2022 at 20:48
  • @StatsScared At this point you're kind of all over the place; I'll just say that your question is about a "high rate environment", not "when an interest rate increases". Dec 14, 2022 at 20:52

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