High inflation is at risk of killing the 60% stocks/40% bond portfolio

Big banks and famous investors are calling it the end of the popular 60% stocks/40% bonds portfolio — an allocation used to lower risk — with investors closer to retirement often allocating a higher portion to bonds.

In the past decade, the S&P 500 crushed the funds replicating the 60/40 portfolio — which returned ~10% annually while the S&P 500 returned 16%.

Bonds vs. stocks: In theory, when stock prices fall, bond prices should rise. But over the past decade, this relationship deteriorated — with both assets often falling together.

The biggest problems for bonds have been high inflation and low-interest rates.

• Low-interest rates are leading to bond returns of just under 2%.
• High inflation lowers purchasing power, leading to higher interest rates — which is bad for existing bonds.

Analysts are seeing high inflation as the “single biggest risk” in the economy right now — which could lead to even worse returns on the 60/40 portfolio…

What they’re saying: Investment banks like Bank of America and Goldman expects bigger losses from the 60/40 portfolio and famous investor, Paul Tudor Jones, shares a similar tone:

• “I think to me the No. 1 issue facing Main Street investors is inflation, and it’s pretty clear to me that inflation is not transitory.”
• “It’s absolutely dead for a 60/40 portfolio, for a long stock, long bond portfolio.”

Inflation protection: Tudor is bullish on commodities and inflation-protected investments (i.e. Inflation protected savings bonds), favoring:

• Bitcoin over gold as a better inflation-hedge.
• Stocks over bonds.