Asset allocation

The improved outlook for the 60/40 portfolio

March 06, 2023

A stacked bar chart with three sections shows valuation percentile relative to fair value. The sections are labeled stretched value, fairly valued, and undervalued. Overlaying dots and arrows show valuations for each broad asset class as of year-end 2021 versus year-end 2022. U.S. stocks went from the 98th percentile as of year-end 2021 to the 79th percentile as of year-end 2022, remaining in the stretched range. Non-U.S. stocks went from the 49th percentile to the 44th percentile, remaining in the fairly valued range. U.S. bonds fell from the 55th percentile to the 43rd percentile, also remaining fairly valued, as did non-U.S. bonds, which went from the 60th percentile to the 37th percentile. Although none of the asset classes dropped to the undervalued category, all saw significant decreases in valuation.
Two box-and-whiskers charts show the range of expected annualized returns over 10 years for the global 60/40 portfolio as of year-end 2021 versus year-end 2022. For 2021, the 5th percentile outcome is a 0.38% return, the 25th percentile is 2.41%, the median or 50th percentile is 3.83%, the 75th percentile is 5.23%, and the 95th percentile is 7.36%. For year-end 2022, the 5th percentile outcome is a 2.59% return, the 25th percentile is 4.60%, the median or 50th percentile is 6.09%, the 75th percentile is 7.61%, and the 95th percentile is 9.84%. An accompanying table shows additional risk metrics. The expected annualized median volatility or standard deviation is 9.51% at year-end 2021 versus 9.86% at year-end 2022. The expected maximum drawdown in any given year is minus 46.73% at year-end 2021 versus minus 40.97% at year-end 2022. The probability of a 10% loss in any given year is 59.50% at year-end 2021 versus 39.49% at year-end 2022.


Ziqi Tan
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