The classic 60/40 portfolio is back on track for the first time since 2021

This year is on pace to be the first since 2021 that stock and bond prices have moved in opposite directions, according to data from investment firm the Leuthold Group (based on common benchmarks for each asset class), the Wall Street Journal reports. The trend suggests that the 60/40 portfolio of stocks and bonds is doing what it is supposed to for the first time in several years.

Despite the recent selloff, financial advisers are urging investors to consider bonds to take advantage of attractive yields. At the heart of their pitch is that bonds are doing what they are supposed to, by at least one measure, for the first time in years, according to the Leuthold data. That measure is their correlation with stocks. For the first time since 2021, the two asset classes are moving in opposite directions, as they traditionally have.

The classic 60/40 portfolio consists of 60% stocks and 40% bonds. For decades, this structure cushioned volatility and served as the standard for balanced investors because, historically, one asset would rise when the other fell. In recent years, however, the 60/40 portfolio has struggled. Its problems began in 2022, when high inflation and rising interest rates sent stocks and bonds falling in tandem. Supply-chain disruptions and geopolitical shocks broke down the inverse relationship between the two asset classes. Although both stocks and bonds rose over the following three years, many investors dumped bonds in favor of better-performing stocks. Now, however, the portfolio may be regaining its appeal, the WSJ writes, as asset managers once again advise clients to invest in an asset class that many market participants have grown to despise.

A sweeping selloff has continued across global government bond markets in recent months, while U.S. Treasury yields have reached their highest levels in 24 years. Investors’ concerns are being fueled by several factors, including strong U.S. business activity, U.S. public debt surpassing $40 trillion, rapidly rising spending on AI development, and high oil prices due to the war in the Middle East. These factors are driving inflation and prompting market participants to bet that central banks, including the Fed, will continue raising interest rates.

This year’s debt selloff has dragged on returns for investors who already hold bonds. However, signs are emerging that the situation is changing, the WSJ says. Flows into bond funds year to date have already outpaced those of every full year since 2021, according to Morningstar.

“The biggest challenge is going to be psychological,” said Brian Spinelli, cochief investment officer at wealth manager Halbert Hargrove. “When people think fixed income, they’re anchored to what it was when rates were near zero, but you’re in a different yield environment than you have been over the last 15 years.”

David Busch, chief investment officer of Trajan Wealth, has been investing in bonds with three- to five-year maturities. He sees them as a good alternative for investors with large amounts of cash parked in money-market funds because the securities allow them to lock in current high yields.

Another approach is to build a bond ladder, spreading out investments among bonds with progressively later maturity dates, explained Collin Martin, head of fixed-income research and strategy for the Schwab Center for Financial Research. “There’s always risks with bond investments where prices can decline,” he said. But “we’re seeing income that you can earn that we haven’t seen in nearly two decades.”

However, there is another view in the market, with many advisers continuing to highlight the pitfalls of investing in bonds, the WSJ notes. Some are concerned that stocks and bonds have both become too closely tied to AI companies, which raises the risk that the two asset classes will continue moving in tandem.

The 10 biggest companies in the S&P 500 are heavily driven by tech and AI and account for 40% of the index, according to Apollo Global Management data. Meanwhile, 49% of new investment-grade bond issuance so far this year has been AI-linked. This underscores the importance of diversifying both stocks and bonds in a portfolio, according to Brent Wilsey, chief investment officer at Wilsey Asset Management. “If you invest conservatively in food companies and transportation companies, good solid businesses that will grow no matter what happens, you’re going to be fine,” he said.