The demise of the 60/40 Portfolio

Bonds

Government bonds have been depreciating over the last year and have most likely lost their ability to be the antifragile portfolio foundation they once were. Especially long government bonds have been hit, with high inflation playing a big role in their decline. Investors will have to find a new foundation and adapt.

The correlation problem

The name of the 60/40 portfolio derives from it containing 60% equities and 40% bonds. When one of the two struggles the other one is supposed to come to the rescue. We again want to point out that their historic return patterns are quite similar and the negative correlation between the two is more of an historic exception then the rule. It is exactly this positive correlation which has caused a lot of pain this year. The bad performance of both stocks and bonds absolutely crushed the classic 60/40 portfolio this year. At the same time, the situation could get even worse. Demand for US Treasuries has been negative for the first time in 10 years. We have also seen how fragile the system is, with the Bank of England having to massively intervene to prevent another crash.

The solution

For the mixed portfolio falling stocks and bonds are the worst-case scenario. What is needed is a stabilizer. Historically what followed this sharp decline of stocks and bonds was a similar sharp devaluation of fiat money against gold. This could also be the case today. Institutions are also looking at FAANG 2.0 to solve this problem. Should the relationship between stocks and bonds continue to be reversed gold will certainly play a large role in alleviating some of the pain caused by falling stocks and bonds.