Amid a year of record-high inflation and market volatility, there’s been a lot of talk about how the traditional 60/40 portfolio has gone the way of the dodo, but Tim Buckley, president and CEO of Vanguard, argues that that’s nonsense.
“Now, the news cycle is full of claims that 60/40 (traditional diversification) is dead. Hardly. It is time tested since the late 1920s,” Buckley said. “It has seen high inflation, low inflation, bull markets, and bear markets. Market and business cycles of different shapes and sizes.”
Buckley isn’t alone in thinking this. Andy Kapyrin, co-CIO of the Morristown, N.J.-based financial advisor RegentAtlantic, told Barron’s that investment-grade corporate bonds are yielding between 5% and 6%.
“The prospects for 60/40, especially on the bond side of 60/40, have not been this good in a long time,” Kapyrin said.
So, while it’s not been a great year for fixed income (to say the least), investors should still have bonds in their portfolios if we enter a recession. According to Vanguard’s 2023 economic and market outlook, it’s very likely that we will.
“Significantly deteriorated financial conditions, increased policy rates, energy concerns, and declining trade volumes indicate the global economy will likely enter a recession in the coming year,” the outlook stated.
Fixed income investors bracing for a recession that haven’t given up the dream of the 60/40 portfolio may want to consider a fund that provides broad-based exposure to a broad spectrum of public, investment-grade, taxable, fixed income securities in the U.S.
Enter the Vanguard Total Bond Market Index Fund ETF Shares (BND). BND seeks to provide broad exposure to the taxable investment-grade U.S. dollar-denominated bond market, excluding inflation-protected and tax-exempt bonds by tracking the performance of the Bloomberg U.S. Aggregate Float Adjusted Index.
According to the issuer, BND generally:
- Offers relatively high potential for investment income; share value tends to rise and fall modestly.
- May be more appropriate for medium- or long-term goals where you’re looking for a reliable income stream.
- Is appropriate for diversifying the risks of stocks in a portfolio.
BND is also very inexpensive, carrying an expense ratio of just 3 basis points.
For more news, information, and analysis, visit the Fixed Income Channel.