Modernizing a Classic: 3 Fresh Takes on How to Play the 60/40 Portfolio Strategy

The 60/40 portfolio strategy was thought to be dead and buried. And yet, it made a comeback in 2023, up more than 11% through the end of November. 

“George Ball, chairman of the large private wealth manager Sanders Morris Harris, told Fortune last December that people would regret neglecting the old standby. ‘It was only recently when the death of the 60-40 [portfolio] was widely reported, and generally when you get that sort of headline it’s ill-timed and ill-advised,’ he said in a prophetic interview,” Fortune reported in late November. 

The 60/40 portfolio, for those unaware, allocates 60% of your investments in stocks and the remaining 40% in bonds. However, with the average annual return of the 60/40 strategy over the past decade at around 6.4%, investors and financial advisors looked elsewhere. 

Today, however, with interest rates higher than they’ve been since July 2007, an argument can be made that the 60/40 deserves another chance. 

Here are three new ways to play the 60/40 portfolio strategy.

Berkshire Hathaway (BRK-A, BRK-B) / First Trust Preferred Securities and Income ETF (FPE)

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I’ve always thought of Berkshire Hathaway (NYSE:BRK-A, NYSE:BRK-B) as a tremendously sizeable mutual fund or ETF that charges zero fees. You can’t get much better than that. It represents the 60% equity portion of the portfolio.

The company has been in the news recently because of Vice Chairman Charlie Munger’s death on Nov. 28. While Munger might be gone, he helped Buffett set a way of thinking at the company that will last for many years beyond the duo’s passing. 

Buy some Berkshire now. When Buffett dies, buy some more if its shares fall — I don’t think they will. Buffett would.

As for the fixed income portion, I’ve chosen the First Trust Preferred Securities and Income ETF (NYSEARCA:FPE), partly because Berkshire has long made significant preferred share investments in struggling companies in exchange for obscenely lucrative returns. 

FPE is an actively managed ETF with $5.3 billion in net assets. It was launched in February 2013. It invests in preferred and income-producing debt securities such as corporate bonds and high-yield and convertible securities.

Morningstar rated it four stars out of five over the past 10 years for risk-adjusted returns relative to 36 funds investing in preferred stocks. 

Invesco S&P 500 Equal Weight ETF (RSP) / IQ Merger Arbitrage ETF (MNA)

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The Oracle of Omaha has always maintained that regular investors should probably invest in a low-cost S&P 500 index fund short-duration government bonds.

Rather than a market cap-weighted S&P 500 ETF, I’ve chosen the equal-weighted Invesco S&P 500 Equal Weight ETF (NYSEARCA:RSP). 

I’ve always liked RSP because it focuses on the winners in the index every quarter rather than just the largest companies. That means you won’t get a “Magnificent Seven” situation, which is good if you’re worried about significant losses. 

While it’s been nice in 2023 for the Mag 7, it cuts both ways.

In 2022, the index had a total return of -19.44%. The SPDR S&P 500 ETF Trust (NYSEARCA:SPY), the cap-weighted index ETF, had a total return of -18.17%, while the RSP’s total return was -11.62%, considerably better than the index or SPY. 

Over the past decade, RSP has been in the top quartile of large-cap blend funds on five occasions, generating a 10-year total return of over 9%. 

Now for the 40% lower-risk portion of the portfolio. 

The IQ Merger Arbitrage ETF (NYSEARCA:MNA) does not get a good rating from Morningstar — two stars. With a 10-year annualized total return of 2%, it’s easy to see why. 

However, I look at the ETF as something to be used as a defensive measure in uncertain times. The ETF tracks the performance of the IQ Merger Arbitrage Index, a collection of stocks where a takeover has been announced, looking to benefit from global merger arbitrage activity.

From 2013 through 2020, MNA generated positive returns. In the past three years, regression to mean has taken hold, with annual returns of -3.26% (2021), -1.61% (2022), and -1.59% (2023). 

In 2022, this particular 60/40 portfolio would have lost nearly 8%, less than half the loss from the SPY alone.

iShares MSCI ACWI ETF (ACWI) / Invesco Taxable Municipal Bond ETF (BAB)

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The 60% equity portion for the final of the three portfolios is the iShares MSCI ACWI ETF (NASDAQ:ACWI), which tracks the performance of the MSCI ACWI Index, a collection of stocks from developed and emerging markets.

I chose ACWI because it provides a global portfolio of equities, including a healthy 62.54% weight for the U.S. With one ETF, which charges a reasonable management expense ratio of 0.32%, you get investments in 47 countries.

Seven of ETF’s top 10 holdings are components of the Mag 7. However, the top 10 accounts for about 19% of the fund’s $18.3 billion in net assets. The remaining 81% is investing in 2,332 companies. 

Diversification is the key. 

The 40% component of this final 60/40 portfolio is the Invesco Taxable Municipal Bond ETF (NYSEARCA:BAB). The ETF tracks the performance of the ICE BofAML U.S. Taxable Municipal Securities Plus Index. The index is a collection of U.S. dollar-denominated taxable municipal debt issued by U.S. states and territories. 

Rebalanced and constituted every month, the ETF is rated five stars for the 3-, 5- and 10-year periods. It currently yields 3.74%. 

Its net assets are $1.53 billion, invested in 708 securities. The top 10 holdings account for 8.6% of the overall portfolio. Regarding maturity, the largest weighting is 28.29% for those coming due in 15 to 20 years.

On the date of publication, Will Ashworth did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.