Ecoinometrics - Breaking down the 60/40 portfolio

One of the most popular portfolio construction is being tested. But is it really breaking down?

The 60/40 portfolio construction is a balance between capturing the growth of the stock market and the stabilizing factor of receiving regular income from owning bonds. 

Compared to running a strategy purely based on risk assets, the 60/40 portfolio is supposed to provide you with some hedging based on the historical anti-correlation pattern between bonds and stocks.

There is one problem though, this pattern is starting to break.

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Breaking down the 60/40 portfolio

When you hear about the 60/40 portfolio from your average financial advisor you'd think that this is the greatest invention financial engineering ever produced.

You get the upside of the stock market. You get the income of the bond market. And since typically stock prices and bond prices move in opposite direction the two combined is more than the sum of the parts.

What else can you ask for?

Well you can ask that it works as advertised.

So let's look at the data.