Sid Hopps
Apr 20, 2023
In a 60/40 portfolio, you invest 60% of your assets in equities and the other 40% in bonds. The 60/40 portfolio is designed for moderate risk and moderate returns. This counts on the fact that while the stock market periodically goes down, and the bond market periodically goes down, they rarely go down at the same time — a phenomenon called having a low (or negative) correlation.
In a 60/40 portfolio, you invest 60% of your assets in equities and the other 40% in bonds. The 60/40 portfolio is designed for moderate risk and moderate returns. This counts on the fact that while the stock market periodically goes down, and the bond market periodically goes down, they rarely go down at the same time — a phenomenon called having a low (or negative) correlation.
Investors and investment managers both like the strategy because it is easy to implement and easy to understand.
“For the past two decades, the stock/bond correlation has been consistently negative, and investors have largely been able to rely on their bond investments for protection when equities sell off,” wrote researchers at investment firm AQR earlier this year.
Last year, stocks were down big, and bonds lost money too. The Dow Jones U.S. Total Stock Market index lost 19.5% including dividends, while the ICE BofA U.S. Treasury index lost 12.9%. The classic 60/40 U.S. portfolio had one of its worst years ever, because the bonds didn’t do what they were supposed to do.
The 1147 Capital Momentum Index is built off a robustly constructed portfolio with correlations factored in. However, the actively managed index also takes into account the possibility of shifting correlations through active portfolio rebalancing and trend assessment.
If the index constituents all fall simultaneously, the index will automatically rebalance into appropriate positions to preserve as much capital as possible.
While our index declined moderately in 2022, the pullback from equity highs was about half of that of the S&P500 broad market index.
