Hail the 60/40 stock/bond portfolio. It has worked, yet a recent AQR research piece, Diversifying and the Rearview Mirror, suggests that the value of the 60/40 portfolio will change based on the variable Sharpe ratio of the stock-bond combination. There are times when diversification beyond the 60/40 mix is a drag and other times when it is needed. The average Sharpe ratio for the stock/bond mix is 0.4, so if the Sharpe ratio reaches 1 or falls below -0.5, it is likely to mean-revert. Hence, a selective diversification strategy is valuable. If you feel too good about your 60/40 mix and it feels like diversification is a drag, start diversifying, and if you think the 60/40 mix is proving to be wrong, it is likely to work in your favor. In practice, this is not easy to implement, but it is worth thinking through when to diversify.
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