Playing it safe in the stock market, for many people, means holding a portfolio that's 60% S&P 500 stocks and 40% bonds. But this popular portfolio is failing, big time.
Had you entered the year with a so-called 60/40 "set it and forget it" portfolio, you'd be down nearly 20%, says an Investor's Business Daily analysis of data from S&P Global Market Intelligence and MarketSmith. That's profound, in that it means a "safe" portfolio is essentially thrust into the bear market, too.
If this seems unusual, that's because it is. It's the worst start to a year for the ever-popular 60/40 portfolio since at least 1976, says Bespoke Investment Group. In other words, this safe portfolio is suffering its second-worst period on record. This "safe" portfolio never dropped more than 6% previously. Keep in mind this is the "diversified" portfolio many people are told to hold.
"We are only halfway through June, but a 60/40 portfolio continues to get crushed by the combination of soaring bond yields and new equity bear market lows," Bespoke said. "We hope decision-makers (like the Fed) and pundits saying that we still need to see a 'market flush' truly appreciate the wealth destruction seen so far this year."
The Problem Isn't Just The S&P 500
It's tempting to blame the S&P 500's epic 23% crash this year for your ugly portfolio. But if you look deeper, you'll find there's a bigger problem for most investors.
The portion of a 60/40 portfolio designed to ballast the stock market volatility is bonds. That's the part, usually 40% of portfolios, which is failing miserably. The Vanguard Total Bond Market ETF, one of the world's most popular bond ETFs, is down more than 12% this year. That's a full-blown correction and then some for the part of your portfolio that's supposed to be holding up.
"Bonds have delivered -11.7% total returns this year, adding to — and arguably causing — the collapse in equity prices rather than offsetting the stock bear market," Bespoke said.
Mixed with a 24.2% drop in the stock part of the 60/40 portfolio, measured by the Vanguard Total Stock Market ETF, spells a big meltdown in a portfolio you thought was diversified. Now you understand why many millionaires wish they held more of this asset.
S&P 500 Sectors: Nowhere To Hide
And here's a new twist. Now even S&P 500 sectors that were impervious to the bear market are crumbling.
S&P 500 energy stocks had been the only bright spot for investors. Not anymore. Investors paying attention knew early that this sector would suffer mightily in a recession.
The Energy Select Sector SPDR Fund is the only S&P 500 sector still up for the year. But that's reversing, and fast. Shares of the energy ETF are down nearly 16% from their recent high on June 8. That's actually the worst showing of any of the S&P 500 sectors in that time. That one-week drop more than wipes out the energy sector's 3.4% dividend for the entire year.
Utilities, another "safe" bet, are also falling apart. The Utilities Sector Sector SPDR ETF is down nearly 9% just this year. Yes, that's better than the S&P 500's drop. But it more than erases the sector's coveted 3.0% annual yield, which for some is the only reason to own the stocks.
It has been a rough year. But not everyone is ready to pronounce the death of the 60/40 portfolio.
"The 60/40 portfolio isn't dead," said Barry Gilbert, Asset Allocation Strategist for LPL Financial. "It may have been wounded this year ... but we believe the losses in stocks and bonds this year increase the chances of positive outcomes going forward. Long-term investors take note."
Your 60/40 Portfolio Isn't Safe
| ETF | Symbol | Amount invested Jan. 1 | Value now | YTD ch. |
|---|---|---|---|---|
| Vanguard Index Funds - Vanguard Total Stock Market ETF | $6,000 | $4,548 | -24.2% | |
| Vanguard Bond Index Funds - Vanguard Total Bond Market ETF | $4,000 | $3,505 | -12.4% | |
| 60/40 portfolio | $10,000 | $8,053 | -19.5% |
