When the 60/40 Portfolio Carries the Same Risk as During the GFC

Advisors face a number of challenges in current markets, given risks and stock and bond correlations. They must grapple with how to invest smartly as well as keeping their clients invested in the traditional 60/40 portfolio. Jan van Eck, CEO of VanEck, and Andrew Beer, co-founder and managing member of DBi, joined Michael Batnick, managing partner of Ritholtz Management, to discuss today’s investing environment on The Compound & Friends podcast.

In an environment of aggressive Fed rate hikes and persistent inflation, bonds ceased acting as a hedge for equities for much of the last 18 months. It creates significant challenge as advisors find themselves faced with a changing market regime. It’s a regime of a reversion to mean for stock and bond correlations.

Challenges to the Model

Modern portfolios were constructed at a time when stocks and bonds demonstrated consistent, negative correlations to each other. It’s a phenomenon that is most common in low inflationary environments, according to Beer.

“That’s not normal,” he said. “What’s normal is that in most periods of time, you actually do have a positive correlation between stocks and bonds.”

Image source: The Compound and Friends podcast