Inflation Is the Biggest Threat to the Bedrock 60/40 Portfolio

Wall Street likes to warn that past performance doesn’t guarantee future results, but when it comes to the traditional 60/40 mix of stocks and bonds, it kind of has. Persistent inflation could bring that to an end.

The strategies, in which portfolios hold 60% stocks and 40% bonds, have produced just two down years since 2007. And during the pandemic they’ve been beating averages dating back to the 1980s. The asset allocation mix posted a 17% return in 2020 and is on course for another double-digit return this year. But it posted losses in September and November and is down 0.4% so far in December, just as the Federal Reserve started signaling a hawkish shift.

For decades, investors -- particularly retirees -- have plowed trillions into this mix because it offers growth with a layer of safety. The idea is stocks are the engine, while high-quality government bonds are insurance during market angst. Both asset classes are very liquid and transparent in terms of pricing, providing investors with the core building blocks of a long-term portfolio.

Finding an alternative has also proved challenging. For all the talk about the potential demise of the strategy, assets such as private equity, real estate and private markets are far less liquid and less readily available to retail investors saving for retirement.

However, a number of fund managers think 60/40’s stellar run is coming to a close. And the reason is inflation.