How have different portfolio allocations performed throughout the world?
Amid recent market turbulence, the worst year ever for US bonds, persistent inflation, and the looming threat of slower growth or even recession, this is a critical question, especially given the current debate about the efficacy of the traditional 60/40 portfolio. To answer it, we evaluate the performance of portfolios with asset allocations of 100% equity, 100% bond, 60/40, and 80/20 in the US, UK, Italian, Swiss, and global markets over time on both a lumpsum and dollar-cost averaging (DCA) basis.
We chose these markets because they have widely available liquid instruments with which to execute our strategies as well as varying levels of volatility.
We build all of our hypothetical portfolios with exchange-traded funds (ETFs) except for the world bond allocation. We gathered close price data for the ETFs and net asset values for the global bond fund and reinvested/accumulated the dividends across our 10-year holding period from 31 December 2012 to 31 December 2022. Each country’s funds are priced in local currency and the world funds in US dollars. The only Swiss bond ETF with 10 years of return history had a targeted maturity of 7 to 15 years.
Portfolio Strategy Components
| United States | Equity | SPDR S&P 500 ETF Trust (SPY) |
| Bonds | iShares US Treasury Bond (GOVT) | |
| United Kingdom | Equity | iShares Core FTSE 100 UCITS ETF (ISF) |
| Bonds | iShares Core UK Gilts UCITS ETF (IGLT) | |
| Italy | Equity | Lyxor FTSE MIB UCITS ETF (MIB) |
| Bonds | iShares Italy Govt Bond UCITS ETF (IITB) | |
| Switzerland | Equity | iShares SMI ETF (CSSMI) |
| Bonds | iShares Swiss Domestic Govt Bond 7-15 ETF (CSBGC0) | |
| Global | Equity | iShares: MSCI World (URTH) |
| Bonds | iShares Global Government Bond Index (LU) F2 USD |
We backtested and calculated each strategy’s annualized total return based on a 120,000 investment in the local currency. For the lumpsum approach, we invested the full 120,000 on 31 December 2012. For the DCA approach, we split the total investment into 1,000 local currency cash flows each month for 120 months, from 31 December 2012 to 31 December 2022.
We excluded transaction costs since they are likely to be small for the lumpsum strategy, and while presumably higher for the DCA method, they should not qualitatively affect our results.
Key Points
- The traditional 60/40 investment strategy is under scrutiny due to recent market turbulence, inflation, and slower growth concerns.
- We evaluated the performance of portfolios with 100% equity, 100% bond, 60/40, and 80/20 asset allocations in various markets.
- On a lumpsum basis, the 100% US equity portfolio outperformed other equity portfolios, while the 100% bond portfolios outperformed their global counterpart.
- The 80/20 allocation consistently generated higher returns than the 60/40 allocation in all markets.
- For the dollar-cost averaging approach, the performance trends were similar to those of the lumpsum approach.
- Reducing the holding period to 31 December 2021 and adjusting the investment amount increased annualized returns for both bonds and equity portfolios.
- Overall, the bond market’s poor performance in 2022 negatively impacted returns for bond allocations.
- Further research is needed to draw conclusions about the effectiveness of the 60/40 portfolio.
Rhodri Preece, CFA, David Terris, CIPM, and Karyn D. Vincent, CFA, CIPM, contributed to this article.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
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