The 60/40 portfolio could double your money in the next decade, says JPMorgan

When interest rates are high, and the markets aren't looking up, it may be tempting to put savings into high-yield savings accounts and certificates of deposits. Financial experts, however, beg to differ.

According to JPMorgan strategists, after a disastrous 2022, the classic 60/40 portfolio is poised for a strong rebound, and, in fact, is set to generate 2x higher returns than cash over the next decade.

A portfolio allocating 60% of assets to stocks and 40% to bonds is expected to outperform cash by a remarkable 4.1 percentage points annually, along with beating inflation by 4.5 percentage points, as per a report from JPMorgan Asset Management.

The projection comes as money-market fund returns hit multi-decade highs of over 5%.

“While high cash rates appear compelling, investors should remember that sitting in Treasury bills might mean collecting 5% for limited risk today, but it misses out on the compounding of returns over the longer run,” the strategists said.

Still, you can’t blame investors for disavowing the 60/40 portfolio after it went up in flames during one of the most volatile periods in recent memory.

60/40 portfolio challenges

The endorsement of this classic portfolio comes at a crucial juncture, as it has encountered a surge in critics following its worst performance since the global financial crisis last year.

For the last few decades, the 60/40 stock and bond combination thrived due to a continuous drop in interest rates. Lower rates not only boosted stocks but also raised the market value of bonds, which acted as an effective counterbalance against stocks.

But as interest rates reversed course, this portfolio went out of balance.

That's because when rates rise, it makes stocks less appealing. It also weighs down the prices of already issued bonds as new bonds come with higher yields, dealing a double whammy blow to the portfolio.

“Current market dynamics make it hard for traditional 60/40 portfolios to generate returns, leaving investors searching for alternatives,” said Darren Wolf, global head of alternative investments at abrdn, a U.K.-based asset manager.

A Bloomberg gauge monitoring the 60/40 model has slumped by nearly 4% since July, primarily due to upheaval in the Treasury market, causing investors to seek refuge in safer assets.

But with Treasury yields reaching their peak and expected to hover around 2% to 2.5% over the next five to ten years, other assets promise more appealing returns.

“The 60/40 portfolio certainly isn’t dead,” said Holly Newman Kroft, managing director and senior wealth adviser at asset manager Neuberger Berman. But “it needs to be modernized,” she added.

And that means adding alternative investments to the mix.

Diversified portfolios will pay off in the long run

Despite the current appeal of high cash rates, JPMorgan strategist say investors shouldn’t ignore the long-term benefits of diversified portfolios.

They say $100 invested in cash accounts would grow to $133 over a decade, whereas the 60/40 portfolio is projected to grow that same $100 to $197. Add alternative investments to the mix, and that potential growth surges to $208, they said.

In the end, the optimal allocation of investments for clients greatly hinges on their time horizon, as noted by David Kelly, who serves as the chief global market strategist at JPMorgan Asset Management.

“This is very much a world in transition,” he said. “We don’t expect to go back to low rates soon.”