This might sound familiar if you have a financial planner, as many stick to the 60/40 asset split. Even if you don’t, you might have gotten a recommendation to buy a fund like the Vanguard Wellington Fund (VWELX). This fund has been around for nearly a century (its IPO was in 1929), and it has nearly a 60/40 allocation (closer to 67% and 33%, but no matter).

Unfortunately, owning VWELX (in orange below) has resulted in a big lag in performance compared to the S&P 500 over the decades.

In more recent history, we’ve seen VWELX do poorly compared to the market along with other, newer funds with stricter 60/40 allocations, like the BlackRock 60/40 Target Allocation Fund (BIGPX). Its performance since 2007 (in purple below) has been worse than that of the Wellington fund (in blue).

What about times of extreme stress, like the 2022 crash? These periods are, after all, supposed to be what the 60/40 allocation is made for.

Well, it didn’t exactly pan out that way: In this case, the S&P 500 (in orange below) recovered faster than 60/40—measured by BIGPX (in blue) and VWELX (in purple). In other words, this “conservative” rule didn’t protect investors much.

Now here’s where the story takes an interesting turn. Because there have been times when the 60/40 portfolio has worked. Take the period following the dot-com bubble, when the Wellington fund (in orange below actually turned a profit while the S&P 500 (in purple) sagged.

But this doesn’t really happen anymore; not only did stocks recover faster than 60/40 in 2022, but following the subprime mortgage crisis, stocks recovered at about the same pace as a 60/40 did. This, again, shows that this “rule” worked in the past but, as of the early to mid-2000s, was no longer a realistic way to lower your risk.

Why did the 60/40 allocation outperform the stock market back then and stop succeeding in the mid-2000s?

One part of the answer comes down to regulation.

In 2000, the SEC cracked down on analysts’ practice of giving sneak previews of research to top clients, which allowed big funds to front-run retail investors. They did this with a law called Regulation Fair Disclosure (Reg FD) in 2000.

Then, a settlement with bankers, analysts and regulators called the Global Research Analyst Settlement of 2003 restricted how well funds could use research to get ahead of other investors. Further tightening of regulations beyond these new rules also ensured that big investors’ advantages were reduced, if not scrapped altogether.

This hurt the 60/40 strategy in one crucial way: It made the stock market more efficient. By ensuring information wasn’t selectively sent to big investors, the stock market instead began to go up more gradually and more directly, based on fundamentals. That, in turn, produced more reliable returns, helping attract more investors throughout the 2000s and 2010s, and lowering demand for bonds in the process.

Again, these rule changes are just part of a bigger story. But they help explain why 60/40 is still a fixture in the financial planning-world, even though it began to lose its punch over 20 years ago.

Michael Foster is the Lead Research Analyst for Contrarian Outlook. For more great income ideas, click here for our latest report “Indestructible Income: 5 Bargain Funds with Steady 8.6% Dividends.”

Disclosure: none