A quirk of the economy suggests the classic 60/40 portfolio may be obsolete, veteran investment chief says

• The 60/40 portfolio is no longer the most effective way to balance risk and "decent" returns, Jim Paulsen said.
• The Wall Street veteran said the economy seemed to be entering a new era of less frequent recessions.
• Investors are now rewarded more for investing in stocks, even accounting for the risk, he said.

A time-tested investment strategy might be obsolete given the recent trajectory of the economy.

The 60/40 portfolio — a classic split where investors allocate 60% of their money to stocks and 40% to bonds — no longer looks like the most effective way for investors to nab a decent return while shielding themselves from volatility, according to Jim Paulsen, a Wall Street veteran and the former chief investment strategist of The Leuthold Group.

That's because the US economy looks like it's entered an era in which recessions have become rarer — and investors looking to maximize their returns should probably load up more on stocks, Paulsen said.

"The appropriate 'average' allocation to stocks should be higher for 'all' investors today compared to what it has been historically," Paulsen wrote in a Substack post on Monday. "Because recession risk in the US has probably been permanently lowered compared to its propensity during most of US history," he added.

The 60/40 portfolio split is popular among investors seeking a "decent" return with only "moderate" risk, Paulsen said. But historically, the portfolio has underperformed relative to a portfolio with a 100% allocation to stocks. Since 1926, the 60/40 portfolio has returned 9.5% on an average annualized basis, lower than the expected 12% return on a 100% stock portfolio, Paulsen estimated.

The risk-reward profile of stock and bond investing has skewed even more favorably to stocks over the last several decades, he added.

The US, for instance, was in a recession 17% of the time from the years 1940-1990, Paulsen said, which was around the time the 60/40 portfolio was first popularized.

By comparison, the US has been in a recession just 8% of the time over the last 36 years. Barring the brief COVID-19 recession, the US hasn't had an endogenous downturn for 17 years, Paulsen said.

In a hypothetical environment where the US economy is "recession-less," an investor with a 100% allocation allocation to stocks could expect to make an average annualized monthly return of around 17%, Paulsen estimated. That compares to an 11%-12% average annualized return for the typical 60/40 portfolio.

"This implies that without recessions, every incremental move toward stocks boosts returns more than risks compared to an economy which suffers recessions," Paulsen wrote, though he noted that the US was unlikely to become a true "recession-less" economy.

Still, following a 60/40 portfolio split today will likely eat into long-run returns, he said.

"A retiree today — given that recession frequency has been cut in half since 1990 — should probably consider an average mix meaningfully higher than the 'old' 60/40 convention," Paulsen added.

The 60/40 split has been scrutinized more frequently by market pros over the last several years, particularly as the bull market has raced higher while bonds have failed to hedge volatility in stocks. In the few years leading up to 2025, the 60/40 portfolio posted its worst performance in around 150 years, according to an analysis by Morningstar.