The term "The Back Forty" refers to a remote, often uncultivated, or undeveloped area of land, typically on a farm or ranch. It can also refer to the most remote or inaccessible part of any place. The term originated in the Homestead Act of 1862 in the United States. The act granted 160 acres of land to settlers willing to farm it. This 160-acre quarter section was often divided into four 40-acre chunks, called quarter-quarter sections. "The Back Forty" specifically referred to the 40-acre section located furthest from the farm's main buildings or most accessible areas.
Source: The Back Forty
The phrase "the back forty" has appeared in various forms of pop culture, drawing from its original meaning. Some examples include Culver Studios, which used a 28.5-acre backlot known as "The Back Forty" for filming various television shows, including Hogan's Heroes, The Andy Griffith Show, Star Trek, and Bonanza. Bands, such as "The Back Forty Band" and "Back Forty," use the term as their name, often playing a variety of genres including country, rock, and bluegrass. Businesses, such as "Back Forty Beer Company," incorporate the phrase into their names, referencing the original agricultural term and the overlooked potential it represents. And finally, a book titled "The Back Forty: 7 Essential Embraces to Launch Life's Radical..." uses the term metaphorically to refer to the latter half of life and its potential for new beginnings.
When it comes to portfolio construction, many advisors, market strategists, and economists have embraced a portfolio consisting of 60% stocks and 40% bonds. This allocation aims to strike a balance between growth potential and income, while historically reducing volatility, making it a popular choice for investors with a moderate risk tolerance. Many pension funds, endowments, and charitable organizations target this allocation. A 60% allocation to stocks offers the potential for higher returns but also comes with greater volatility. This is included to drive growth and capitalize on market upswings. This is typically the exciting or sexy part of the portfolio. It garners far more attention from most investors, as well as the media. Most of the typical day on CNBC is spent discussing the stock performance of various companies and sectors.
Source: Advisor Perspectives
The other 40% of the portfolio consists of bonds, which are generally considered less risky than stocks and offer a more stable income stream through interest payments. They help to dampen portfolio volatility and provide a cushion during market downturns. As I have said before, bonds were created to be boring. They are intended to provide stability and ballast to a portfolio, helping to offset the wild ride that sometimes accompanies the 60% of the portfolio allocated to stocks. Therefore, your bond allocation can be described as “The Back 40%” of the portfolio.
The 60/40 portfolio has been a popular and widely used strategy for decades. Over the forty years from the early 1980s to the early 2020s, it is easy to see why so many people adopted this allocation. After Federal Reserve Bank Chairman Paul Volcker raised interest rates aggressively to break the back of double-digit inflation in the early 1980s, interest rates declined for most of the last four decades, as you can see in the chart below. Remember, as interest rates fall, you not only earn the interest rate of the bonds you own, but they also appreciate in value. This resulted in bonds earning nearly three times the return they generated in the previous forty years.
In recent years, some investors and economists have questioned the effectiveness of “The Back Forty” of the 60/40 strategy due to changes in the market, particularly shifts in the bond market and interest rate dynamics. Historically, the performance of stocks and bonds has had a low or even negative correlation. This means that when stocks perform poorly, bonds tend to perform well, and vice versa. However, this relationship doesn'talways hold true, as demonstrated by the market conditions in 2022 when both stocks and bonds experienced significant declines. Many of you will recall this painful experience, as illustrated below.
During 2022, both the U.S. stock and bond markets experienced significant declines, marking one of the worst years for these asset classes in recent history. The S&P 500 lost 19.4%, its worst performance since the 2008 Global Financial Crisis. Similarly, the Morningstar U.S. Core Bond Index fell 12.9%, marking its largest annual loss since its inception in 1999. It turned out to be one of the four worst years of bond market performance over the last 300 years. Similar losses were associated with the post-Civil War era in 1865, and in 1920, after the conclusion of World War I. This simultaneous downturn in both stocks and bonds meant that investors could no longer rely on traditional diversification benefits, as bonds did not offer a safe haven during the market volatility.
In contrast to 2022, the recent bond performance during the policy-induced stock market volatility experienced in February, March, and April of this year saw bonds provide the buffer they typically offer during market downturns. When the S&P 500 index fell 18.7% from its record high on February 19th of this year to its low on April 8th, the Bloomberg Aggregate Bond Index gained 1%, as you will see below.
As bond interest rates are still significantly higher and they have been for most of the last 20 years, this not only gives us more yield than we were used to from 2008 to 2022, but there is room for additional appreciation if the Federal Reserve Bank resumes its interest rate cuts later this year as expected. As you can see in our final chart from today, courtesy of our friends at PIMCO, starting yields in the 4%-5% range have typically led to returns in a similar range over the following three to five years. This is good news for investors who were frustrated by years of bonds yielding under 3%.
In summary, the 60/40 portfolio remains a widely used investment strategy, particularly for those seeking a balance of growth and stability. It's important to consider its potential limitations in the current market environment and to tailor the allocation to your individual circumstances and risk tolerance. While bonds may have been “The Back 40” of your 60/40 portfolio in recent years, there is a potential for them to regain their historical place in diversified portfolios in the future. I thought this was an important story and historical lesson to share with you as we continue “Moving Life Forward.”
© 2025 Jesse Hurst
Senior Wealth Manager
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The views stated are not necessarily the opinion of Cetera and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
Additional risks are associated with international investing, such as currency fluctuations, political and economic stability, and differences in accounting standards.
Neither Cetera Advisors LLC nor any of its representatives may give legal or tax advice. This information is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.
The Bloomberg US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, fixed rate agency MBS, ABS and CMBS (agency and non-agency). Provided the necessary inclusion rules are met, US Aggregate-eligible securities also contribute to the multi-currency Global Aggregate Index and the US Universal Index
Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.
A diversified portfolio does not assure a profit or protect against loss in a declining market.
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