There are several reasons investors can expect a 60/40 portfolio to deliver better potential returns and lower volatility in 2023 and beyond, say Hilda Applbaum, a portfolio manager, and David Hoag, a fixed income portfolio manager, at Capital Group. In 2022, an inverse correlation between fixed income and equities broke down in 2022. Last year was the only time in the past 45 years that both stocks and bonds declined in tandem for a full calendar year. However, that correlation is likely to reverse as inflation is brought under control, they say. As well, attractive income is back in fixed income. Bonds today are offering higher yields than a year ago and higher bond yields mean that fixed income strategies will contribute more to total portfolio return than they have in recent memory and with less risk than equities at comparable yield. Meanwhile, the U.S. Fed is taking a less aggressive approach to rate hikes so interest rate volatility will likely be more muted. In addition, valuations across a range of stocks are more attractive than they were a year ago as well. Finally, dividends can make a difference and will make up a greater share of total return while the market moves sideways. But it is important to remember that there is more to balanced investing than deciding on how much equity and how much fixed income to include in a portfolio. “These aren’t monolithic allocations,” says Applbaum. “For example, growth stocks and dividend payers offer very different risk-reward profiles. So successful balanced investing depends not simply on how much equity is in a portfolio, but also what kind of equity is in a portfolio.”
- PWC