The 60/40 portfolio is the default solution for millions of people who don’t want to spend time agonising over their investments.
The portfolio’s strong track record, simplicity, and appealing balance of attack and defence has convinced a broad swathe of the public that they can dip their toe into the stock market without getting their leg bitten off.
The problem is the 60/40’s track record conceals a major weakness.
While its long-term returns are good, those numbers are the average of different eras.
Decompose the 60/40’s returns by these divergent periods, and the industry standard portfolio looks more like a car that cruises along in fair weather, but struggles to start on cold mornings.
Here’s the break down in inflation-adjusted annualised returns (GBP):
| Period | 60/40 annual return (%) |
| 1900-2025 | 4 |
| 1947-1974 | 1.7 |
| 1975-2025 | 6.1 |
| 1947-2025 | 4.5 |
The 60/40 portfolio is 60% World equities and 40% All Stocks gilts – rebalanced annually. Data from JST Macrohistory 1, The Big Bang 2, Before the Cult of Equity 3, A Century of UK Economic Trends 4, St. Petersburg Stock Exchange Project 5, World Financial Markets 6, MSCI, FTSE Russell, Millennium of Macroeconomic Data for the UK, 7 and ONS. May 2026. All returns quoted in this article are inflation-adjusted total returns (GBP).
The long-term average return since 1900 is absolutely fine. Achieving 4% annualised is a decent result.
But that average conceals a 27-year period of gross underperformance from 1947-74. The 1.7% annualised return earned during that era is 60% worse than the 4% long-run trend.
Experiencing that kind of outcome could mean delaying your retirement dreams, or you having to pour in more money to stay on-track.
Then again, the 60/40 has been in rude health ever since. It notched up a mighty fine 6.1% annualised from 1975 to the end of 2025. 8
Era checking
Unfortunately, those years from 1947 to 1974 weren’t uniquely blighted. It wasn’t a problem with all the vacuum tubes they used or something.
Rather, the record shows a repeating pattern of sub-par performance by the defensive component of portfolios when solely reliant on bonds. (And cash doesn’t look good either).
- UK government bonds lost 76.4% from 1947 to 1974.
- Cash lost 28% in this era, too.
And you wouldn’t have meaningfully staunched the losses by switching to some other bond type. We’re dealing with an intrinsic vulnerability of fixed income assets (bonds, bills, and cash) that was glossed over while the 60/40 was firing on all cylinders from 1975 to 2020.
No super subs
All would be well if I could just point you to a simple upgrade for the defensive part of your portfolio. Or if you could just swap in one of the many multi-asset funds that populate the 60/40 investment space like rows of slightly different shampoos in the supermarket.
I will come up with some suggestions by the end of this two-part series. But in truth the alternatives mostly come with the enough baggage to get you thrown off a Ryan Air flight.
At the very least, the solutions introduce complexities that are liable to prove unpalatable to the very people who most need a 60/40 type product.
Consequently, I think I should start by laying out as clearly as possible what ails the 60/40 portfolio, if you happen to rely upon it at the wrong time.
Rising rate eras: bonds on the blink
Bond prices typically drop when market interest rates 9 rise.
If interest rates trend up for years then we’re living in a rising rate era, typified by increasing bond yields, falling bond prices, and bad times for bond holders.
The dynamic works in reverse, too. Long periods of declining bond yields are associated with rising bond prices and impressive returns on your bonds – a falling interest rate era.
1947-74 was the textbook rising rate era, while 1975-2020 was a dream falling rate era.
The next chart shows the four interest rate eras that prevailed over the past century and a quarter.
Data from JST Macrohistory 10, Millennium of Macroeconomic Data for the UK, 11 and Bank of England. May 2026.
The differing path for interest rates in these eras have a clear impact on bond returns:
The chart starts from 1900, though the left-hand rising rate era began in 1898.
(See the table below and the next chart.)
Here’s the cumulative bond returns per era:
| Period | All Stocks gilts return (%) | Interest rate era |
| 1898-1920 | -71.9 | Rising |
| 1921-1946 | 421.4 | Falling |
| 1947-1974 | -76.4 | Rising |
| 1975-2020 | 1067.4 | Falling |
| 2021-2025 | -40.3 | Rising so far |
The mechanism is straightforward enough. An interest rate rise forces down the price of existing bonds. That price drop means a capital loss for bond holders.
Why bond prices fall when rates rise
As an analogy, think about your situation if you put £100 into a five-year fixed rate savings account at 3%. And then imagine the next day an identical five-year product hits the market with a 4% interest rate.
Now you’re stuck in an uncompetitive savings account for the next five years. FML.
But what if you could sell your 3% savings account including your £100 deposit?
No-one would give you £100 for it, that’s for sure.
They would give you about £95.56 for it though. 12 At that price, the buyer would still trouser a 4% yield if they held your weedier 3%-returning savings account until maturity.
The point: that 4% yield is the same as the 4% interest rate they’d earn by popping £100 into the shiny new 4% 5-year Cash Grabber+ saver account that just shot straight to the top of the Best Buy tables.
That’s the basic background.
When rates only rise
The upshot is that rising rates inflict capital losses onto existing bond owners.
That’s okay. The price will swing in the opposite direction as and when rates fall again. Or you’ll eventually make good the loss over time by reinvesting the proceeds of your bonds into new higher yield issues.
But what if the market keeps demanding higher and higher interest rates for holding bonds?
And you own a portfolio full of 10 to 20 year maturities?
Then the capital losses keep mounting up for your musty old bonds with weeny interest rates long since superseded.
That’s the root of the terrible nominal bond returns in rising rate eras.
The same clockwork unwinds in reverse during falling rate eras. Now your long bond is a must-have collector’s item. Market interest rates keep dropping, so buyers are prepared to pay you top dollar (or pound) for a 10-year gilt bearing a fat coupon rate 13 from the good old days.
Again, if you held a 6% five-year savings account in 2009 when interest rates were evaporating, then you held onto it for dear life.
Are we in a rising rate era?
I can’t help but notice that rising rate eras generally follow on from falling ones in the yield chart above.
There have been sideways eras. But not since – um – the 18th Century.
Moreover, the shortest era in the table above was 23 years long. These trends seem to persist once they take hold.
It doesn’t help the case for the 60/40 portfolio that ten-year gilt yields have climbed like Spider-man since they bottomed out in 2020.
None of which is to pronounce that bonds are doomed. But the historical record does counsel caution.
There are still reasons to own bonds, but perhaps shorter duration ones than has traditionally been the case for mainstream British investors.
You might also want to think twice about holding a default 60/40-type fund if it’s full of conventional bonds, and doesn’t tilt towards the shortish end of the market.
Do two rising rate regimes make a pattern?
You may not need any further convincing but I hate to waste a good chart. Here’s how the regime change switcheroo has played out since 1703:
This pattern has form – including an idyllic century of moderate yield decline from 1798 to 1897.
It’s also intriguing that the April 2026 All Stocks gilt yield of 5.3% sits just north of the long-term average of 4.4%.
So you could argue that falling gilt returns since 2020 are the consequence of a normal yield reasserting itself.
One plausible scenario then, is that gilts now represent reasonable value, and no longer expose their owners to the risks compressed into the anomalously low interest rates of 2020.
Plus, there’s enough wiggle room in the chart above to disbelieve the notion that we’re condemned to some Kondratiev-style cycle of bond boom and bust.
But for me, this isn’t about trying to predict the future.
It’s about pointing out the gaping holes in the 60/40 portfolio risk story that appear when you don’t skip over the awkward parts of investment history.
How do bonds perform during the worst stock market crashes?
A critical role for bonds is reducing portfolio losses when equities implode.
So do they really? Including during rising rate eras?
The next chart shows how bonds performed during every World equities bear market of the past 126 years:
Data from MSCI, Before the Cult of Equity 14, A Century of UK Economic Trends 15, Robert Shiller, The Big Bang 16, Bank of England, Millennium of Macroeconomic Data for the UK, 17, Alan Stocker 18, British Government Securities Database 19, FTSE Russell, and ONS. May 2026. Pre-1970 World monthly returns are market-cap weighted UK and US equities returns (GBP).
And yes: UK government bonds only worsened the situation once – during the disaster of World War One.
The table below summarises the action above:
| World equities bear markets | Nine |
| Bonds increased losses | Once |
| Bonds reduced losses | Eight times |
| Positive bond return | Five times |
| Better negative return | Three times |
Better negative returns means that bonds weren’t as bad as equities. That reduced portfolio losses during the bear market.
That’s not unusual. Often it’s the best our defensive diversifiers can do.
Rise and fall
If we zero in on the three rising rate era bear markets then bonds did badly and exacerbated the situation once (WW1), responded positively once (Flash Crash ’62), and were just less bad than equities once (1970s). Whup.
By contrast, during falling rate eras bonds always improved 60/40 portfolio returns during a shock, responded positively four times, and were the lesser of two evils twice.
On this evidence, it looks like bonds’ ability to hedge equity losses is impaired during rising rate eras. Though it’s worth noting that six out of nine bears pitched up during falling rate periods. 20
On the defensive
I’d like more to go on, so let’s see how bonds perform as a diversifier when we examine every world equities’ drawdown from 1900:
When the gilt 12-month return line (ice blue) is above zero, it’s actively countervailing equity losses with positive returns.
When the blue line drops below the red stain, bonds are making things worse.
If the blue line is below zero, but doesn’t penetrate beyond the red, then bonds are losing money but less so than equities. At least that means they’d have hedged portfolio losses, though we might not thank them for it.
What I like about this chart is you can tell at a glance that the government bonds’ flight-to-quality story mostly holds up in falling rate eras.
But it’s much flimsier (though not non-existent) during rising rate regimes.
Notice, too, how gilts suffered a bear market loss in 2022 while equities did not.
Rising rate era corrections and bears
If I redo the diversification score card for the rising rate eras (including 2021-2025), and include every equity market correction beyond a 10% drop, then the picture becomes clearer:
| World equities corrections and bears | Ten |
| Bonds increased losses | Two times |
| Bonds reduced losses | Eight times |
| Positive bond return | Once |
| Better negative return | Seven times |
Bonds still mostly reduce losses when equities retreat, it’s true. But sometimes bonds aggravate your losses.
Mostly gilts are positively correlated with equity declines. Both assets sink together, but bonds don’t fall as far.
More to the point, bonds lost 5% on average per year during the rising rate eras of 1898-1920 and 1947-74.
That’s a steep price to pay for the leaky defence offered during those years.
Where does that leave us?
What fuels rising interest rates? Pick your favourites: 21
- Heightened fear of inflation
- Deteriorating public finances
- Mounting debt and fading belief in the capacity of the authorities to manage the burden
- Increasing risk of sovereign default
Hmm, nothing to worry about there then!
Actually my argument isn’t that bonds are broken, or bonds are fine, or that we must be in the grip of a new rising rate era.
My argument is that over-reliance on any single asset is setting yourself up for a fall because they can all fail to deliver for decades.
Though I’ve yet to discover a period when they all failed at once.
Multi problems
Multi-asset funds present a particular problem because while they may look diversified, they’re typically chock full of highly-correlated nominal bonds.
This means that a traditional 60/40-adjacent product will probably do just fine if rates fall again or even drift sideways. But it’s likely to disappoint if rates trend interminably upward as they have in the past.
In that scenario, standard-issue multi-asset funds are woefully under-strength in the assets that tend to compensate for nominal bond failings: specifically gold, commodities, and individual index-linked gilts.
For that reason, I can no longer cheerfully recommend all-in-one fund-of-funds to my friends and family who don’t give two hoots about investing but still need a pension.
The best answer is maximum diversification customised to your particular circumstances.
But I get that’s a heavy lift for most of my nearest and dearest – plus many visitors to Monevator.
So in the next episode I’ll do my best to come up with a minimal viable alternative to the current 60/40 default.
Take it steady,
The Accumulator
- Jordà O, Knoll K, Kuvshinov D, Schularick M, Taylor AM. 2019. “The Rate of Return on Everything, 1870–2015.” Quarterly Journal of Economics, 134(3), 1225-1298.[↩]
- Kuvshinov D, Zimmermann K. 2021. “The
Big Bang: Stock Market Capitalization in the Long Run.” Journal of Financial Economics,
Forthcoming.[↩] - Campbell G, Grossman R, Turner JD. 2021. “Before the cult of equity: the British stock market, 1829–1929.” European Review of Economic History. 25. 10.1093/ereh/heab003.[↩]
- Chadha J, Rincon-Aznar A, Srinivasan S, Thomas R. “A Century of UK Economic Trends.” ESCoE, NIESR and Bank of England.[↩]
- Radchenko P. “St. Petersburg Stock Exchange Project.” Yale School of Management, International Center for Finance.[↩]
- Moore L. “World Financial Markets, 1900–25.” Working paper.[↩]
- Thomas R, Dimsdale N. 2017. “A Millennium of Macroeconomic Data for the UK.” Bank of England.[↩]
- The only reason I’ve cut off the study at the end of 2025 is because I haven’t updated my spreadsheet for 2026 yet. But 2026’s numbers don’t make any material difference to the point of this article.[↩]
- i.e. The prevailing rate of interest demanded by the market in exchange for holding a particular bond. This is influenced by, but not to be confused with, central bank interest rates.[↩]
- Jordà O, Knoll K, Kuvshinov D, Schularick M, Taylor AM. 2019. “The Rate of Return on Everything, 1870–2015.” Quarterly Journal of Economics, 134(3), 1225-1298.[↩]
- Thomas R, Dimsdale N. 2017. “A Millennium of Macroeconomic Data for the UK.” Bank of England.[↩]
- Dial-in face value ‘100’. Coupon rate ‘3’. Market rate ‘4’. Years to maturity ‘5’. Days since payout ‘1’. Coupon frequency: annual.[↩]
- Coupon rate is just bond talk for the fixed interest rate paid on a bond.[↩]
- Campbell G, Grossman R, Turner JD. 2021. “Before the cult of equity: the British stock market, 1829–1929.” European Review of Economic History. 25. 10.1093/ereh/heab003.[↩]
- Chadha J, Rincon-Aznar A, Srinivasan S, Thomas R. “A Century of UK Economic Trends.” ESCoE, NIESR and Bank of England.[↩]
- Kuvshinov D, Zimmermann K. 2021. “The Big Bang: Stock Market Capitalization in the Long Run.” Journal of Financial Economics, Forthcoming.[↩]
- Thomas R, Dimsdale N. 2017. “A Millennium of Macroeconomic Data for the UK.” Bank of England.[↩]
- Stocker AJ. 2024. “Total Returns for UK Gilt Sectors of Different Maturities from 1870 Onwards.”[↩]
- Cairns A, Wilkie D, ESCoE Historical Data Repository. “Heriot-Watt / Institute and Faculty of Actuaries / ESCoE British Government Securities Database.” ESCoE.[↩]
- As you’d expect. Rates normally plummet when economic demand collapses.[↩]
- Not intended as a comprehensive list.[↩]
Interesting piece, look forward to part 2. Would love you to approach vanguard etc for a comment.
@Kim Vanguard have already published several articles on their use of bonds as a diversifier in different economic conditions, and their dim view on suitability of gold, commodities and other assets that do not produce any cashflows or are not otherwise productive.
Grappling with asset allocation as I’ll be retiring in a months’ time. Interesting putting different AI models to the test on the whole issue of duration risk (which in my view is what this is all about).
I am leaning towards money market / index-linked gilts ladder, which suggests I also think we’re in a rising rate environment.
Already looking forward to the next part as I’m also really grappling with what to do on the defensive side of the portfolio.
@Baron Got any links on those Vanguard posts? Searching doesn’t_appear_ to show up much that matches your description.
Because we can precisely mathematically calculate what a bond “should” be worth after a change in rates, I think maybe Mr market isn’t fully pricing in the risk of changes to the rate. Ideally it would be priced in, but I wonder if the big buyers who might seek out any apparent discounts, clinging to the short term maths, are an overwhelming force in the bond market.
Now that we’re beginning to talk about it more, some of the illusions might be melting away and finally being priced in that tiny bit more
I have a couple of multi-asset funds in a pension and also have a higher equity % using ETfs and with short term fixed income as a trade off in another account.
But while i take the point of predicting the future and the way bonds have reacted in the past i still feel at the moment i could recommend funds to family members who have no interest in any form of time being used on investing.
The last 5 years cannot be used as a guide but have certainly had there ups & downs – yet the usual funds mentioned on things like Trustnet or MSE etc and at various fee prices have probably good annualised returns for someone happy to set & forget over them 5 years.
i.e at various price points for fees with many others in each price band
VLS 60 – 6.27%
L&G Index 6 – 8.32%
Barclays global markets growth – 8.4%
Aegon Diversified Monthly – 6.47%
Artemis Monthly Dis. – 11.5%
and if you really want to pay high fees Orbis balanced – 15%
Trying to explain Gold and commodities etc to family members (and with apologies also my wife) makes ready made funds still have a place for me – but not so sure about target/life styling retirement type funds any more.
But it feels like part 2 could be a very interesting & important article.
Some target/life styling retirement type funds are holding individual index-linked gilts.
e.g. as per annual report for Vanguard LifeStrategy Funds ICVC for year ended 31 March 2025, the Vanguard Target Retirement 2025 Fund had holdings in four UK Inflation-Linked Gilts with maturities 22/03/26, 22/11/27, 10/08/28 and 22/03/29
Interesting, there is no perfect portfolio of course as we all know. Doesn’t stop us looking for it though !
I believe you have to go back and think hard what you are investing for, (it’s not necessarily the highest returns …)
You may be investing for the future , you then have to recognise when you get there and inevitably, you will be trying to protect it.
When (if) you ‘have won the game ‘ then it is the time to consider, to stop playing THAT game. Perhaps aim for a liability driven strategy , at least in part.
Bonds are giving a real return presently and you can lock that in if you wish.
We may be in an era of rising rates, we certainly exited a period of falling rates in 2020 and it accelerated…
Buying US treasuries (gilts) in the early 80’s was great and you had a 40 year run of falling rates and rising prices ( falling yields) the longer it went on , the less attractive the bonds were….
If we are in an era of rising rates ( and falling prices ) then maybe we should think of Buffets analogy to the hamburger buyer ?
I have been investing for a long time and have seen many equity market falls , I have remained resolute and not panic sold equities and have generally held some bonds at all times, but after market falls you always kick yourself for not holding more and again we find ourselves in a position, with rising equity prices and possibly falling bond prices, it would not be unreasonable to slowly swop
some of one for the other. I’d like to call this a tactical asset allocation shift , others might call it market timing !
However the longer equities do well , we see no reason to be in a hurry to exit equities and we all “know” they win in the long run, so what’s the rush…
The 60:40 looks reasonably placed going forward. I’d suggest ‘buckets’ for the bond element, personally I hold the 0-10 year linker’s iShares fund ,ultrashort £ bonds, 0-5 year gilts index , short term investment grade £ index fund and an aggregate hedged global bond fund, with a view at some point of going longer for another element.
Looking at bonds as a portfolio in itself , rather than one generic element called bonds. The different elements perform differently in different scenario’s, so why not hold all of them. ( there may an argument to add gold and commodities to such a mix )
https://research.santiagocapital.com/p/why-bonds-stopped-working
I read this a few weeks ago and have been pondering it since. Echoes a lot of what you’re saying and so quite looking forward to your part 2.
Right now, I’m considering making my own version of the 60/40
60 world equities
–
10 gold
10 commodities
7.5 infrastructure
7.5 trend following
5 cash / money market funds
I know the glaring gap in this portfolio is ignoring government bonds, but I’m doing that intentionally. I just can’t bring myself to keep them when I look at the amount of government debt that continues to pile up. No one would be investing in a western government if it were a business. The only way I can see governments paying back this debt is for them to inflate it away, which won’t be good for the bond holders.
Not to mention the true inflation shock that has yet to come from the Iran war. Rumor has it that we haven’t been feeling the full effects of the oil shock because China is keeping things afloat via releases of their strategic oil reserve.
I’m just re-jigging my father’s portfolio and this is a real problem… Vanguard Lifestrategy would be nice and simple, but a no-go for the reasons in the article. So what are the options:
Cash is trash (Ray Dalio).
Gold is much easier to hold these days than to buy into from scratch. Significant downside risk after its mad run, and it has recently behaved more like a risk asset.
Commodities – another good idea in principle, but the time to buy was last year. Probably not a great hedge to buy in the middle of a commodities crisis.
Inflation-linked bonds – one of the few options that look viable right now. Very good real yields on TIPS, good on UK linkers, low but positive on German ones with less default risk. Need to be held as individual bonds.
Hedge funds – Global Macro and Trend should be on the menu imo, for lack of alternatives. Of course, problems with cost and transparency. Fundamentally uncorrelated or anticorrelated with stocks and bonds.
@Sparschwein – Having done the same in looking for someone last year and having found Two problems in that as the article says 60/40 has shown problems at times with bonds and that true passive funds like VLS60 do not adapt (but even they have added VLS60 Global as a tweak on the original home bias) but that is the choice going DIY and to be fair has worked.
It might be blasphemy but i wonder if doing 60/40 as set & forget there is now a place to consider active versions that can at least move with the markets a bit even if that might come with its own problems.
From the mid range fund fee’s @ .3% to .5% and up – there is more possibly added to the mix rather than just stock/bonds
The combination of underperformance and apparent failure to protect in the event of a crash, especially went combined with rates rises, means every time I reach for some steady bond ballast I change my mind. The analysis is spot on. I’m very keen to see what mix you come up with as a best blend to address this knotty problem.
@PDBD Can I suggest you read Living Off Your Money by Michael H McClung, that will help.
@Hariseldon said: ‘…it would not be unreasonable to slowly swop
some of one for the other. I’d like to call this a tactical asset allocation shift , others might call it market timing !’
Why not just rebalance back to you target allocation, no market timing needed. Generally I do this at the start of each tax year, but if there are large market moves that mean my portfolio has significantly moved away from target allocation, then do it then.
@TA plumping up the cushions for Part 2…
One quibble at this stage – I think we should move away from the language of there being a “defensive” part of the portfolio, despite its venerable history (I think Ben Graham first came up with it?). It makes some sense if you just add cash or short dated bonds to an equity portfolio to dampen volatility, presumably for psychological rather than strategic reasons.
But for a decumulation portfolio in particular, (i) you want a wider variety of assets than just stocks and cash/bonds, and (ii) if these assets are genuinely uncorrelated (a big “if”, I know) you actually want them to be relatively volatile, so you don’t have to give up as much of your equities allocation to get the diversifying benefit.
Hence a retirement portfolio should include gold and other commodities, trend following funds and perhaps other liquid alts that have a track record of having no/low correlations with equities.
Hi
Nothing really original.
for me the purpose of the 40% is to act like a ballast on the portfolio.
Even opportunistic buying and rebalancing.
It could be available to spend if needed if you didn’t want to sell some of the equity 60% at that time.
Also hopefully it (the 40%+60%) doesn’t all go down the pan at the same time.
So trying to maximise the returns on the 40% isn’t the main driver. If you can get close to real term growth that could be enough. Adding excessive risk to this part of the portfolio seems to me to be unnecessary. And defeats to point.
The focus for me should be on the 60% and with a secure ballast there maybe scope for increasing risk and hopefully retuns.
Thanks for article and comments.
@KLJ – I’m fine with active management in principle, if it adds value or if there aren’t any good alternatives (as with the hedge funds I mentioned).
But in the case of active stockpicking vs indexing, there is plenty of data that active underperforms.
As for mixed funds or wealth managers that adapt their asset allocation, I haven’t seen any such comparisons (has anyone?). To avoid a 2022-style bond crash, managers would have to correctly predict inflation and interest rates. Which even the experts at the central banks with their vast troves of data can’t. Remember central banks said through 2021 that inflation was “transitory”… then we lost some 30% in purchasing power, and the next inflation wave is on the way.
If there is a fund that has a consistent track record of anticipating such turning points, I might give it a try.
My father’s bank pushed some wealth management, basically a fund of active funds with a cool 3% p.a. in total costs. With a dodgy, misleading sales pitch. Turns out they lagged Lifestrategy 60, with similar proportion of stocks.
@Sparschwein
Check out Elm Wealth run by Victor Haghani, they do some semi-active changes based on expected returns. It’s quite interesting byt the jury is still out on whether it can consistently beat its index benchmark.
Just a personal comment from an ancient Monevator a bit down the road-80 yrs old and 23 yrs rtd
Was 30/64/6 at retirement -now nearer 36/58/6
3 global index funds only -2 equity and 1 bond
6% =2+ years living expenses in cash
Portfolio now almost back to pre 2022 levels-withdrawal rate remains steady at around 3.4%
All very personal to me of course but in my case “buy and hold” and “ stay the course” seems to have worked -so far!
xxd09
@Sparschwein – Totally agree about the data on active which is why i mentioned it was blasphemy to mention it. But i probably worded it wrong when saying active funds could adapt (although they can try) But more in the sense that multi asset funds that are active even at the mid price range for fee’s can and do add assets or parts of the market that the Vanilla passive funds like VLS do not with there set percentages – which might or might not be better as you mentioned.
@TA An excellent piece, and very pertinent – I struggle far more with this side of my PF than the equities part, and worry the more as I approach retirement. A minor niggle, perhaps, but I do find it a little frustrating that you’re embarking on another mini-series whilst we’re still waiting for the completion of the also-excellent (and in many ways similar) ‘De-risking your portfolio’ series started last November!
“over-reliance on any single asset is setting yourself up for a fall because they can all fail to deliver for decades.”
Consider an elderly couple fearful that it may be necessary to pay ‘care’ costs for both. They expect to meet those costs largely by selling their house. So that means that their portfolio is essentially House: 60:40 which might mean, say, 75:15:10. Short of selling up early how are they to escape that high reliance on the value of the house? (I accept that the demographics of likely baby-boomer deaths in the next few years might mean that selling a house early could be wise but I doubt many will opt for that strategy.)
I suppose they could do an ‘equity release’ and use it to buy more financial assets. Would many grasp that nettle? Wiser to stick with what you know?
@Kim – I’d love to hear what Vanguard would say too. I looked at LifeStrategy at the weekend and thought: this isn’t good enough anymore.
@Baron – I think it’s worth questioning the fundamental basis of those arguments. Commodities futures funds have three sources of return: https://monevator.com/commodities-investing/
Gold is speculative yet is widely held by central banks among other institutions because of its usefulness as a hedge.
https://monevator.com/gold-an-asset-for-troubled-times/
And why are most multi-asset funds so light on index-linked gilts yet contain 57 varieties of nominal bond?
LifeStrategy 60 holds 1.8% in index-linked bonds. That’s not going to cut it.
At the very least they could hold more cash or shorter bonds. Even that would improve returns if you doubt we’re in for another long disinflationary regime.
@AM – Thank you for the link. Santiago Capital are making the same point. The difference is they claim to know the 45-year disinflationary regime is over.
I’m saying you don’t need to believe that. You just need to know that a rising rate era is possible, it’s happened repeatedly in the past, and the traditional 60/40 portfolio does not have your back in that case.
Re: not investing in bonds. Fair enough, but as with equities the best returns occur after the shock. That’s partially why I’m not in favour of ditching nominals completely. See this timely comment on another thread: https://monevator.com/how-returns-can-lead-us-astray/#comment-1952168
@Hariseldon – If you’ve won the game then yes, you don’t need to worry. If 1% growth or so is fine then I’d say carry on regardless. Seems like a fairly select group though?
@KLJ – The last 5 years returns for VLS60 are 5.61% annualised (nominal) according to Vanguard.
Real annualised return = 0.61% when you subtract 5% annualised inflation during the period.
Vanguard’s version of the 60/40 is exhibiting the rising rate flaws I’m talking about.
However, your point about explaining gold and commodities to the family is well made. It’s my dilemma in a nutshell.
Ideally you wouldn’t need to explain anything because there’d be a multi-asset fund that hid it all under the bonnet. The multi-asset funds I’ve seen typically allocate only a few percent to alternatives. I’d be happy to recommend active funds that solved this problem by properly diversifying across a better range of non-correlated assets.
Have you spotted some you think are viable?
Failing the existence of suitable funds, what could a disengaged investor live with? That’s a genuine question. I could do with other views on this. I think cash, anything else?
@c-strong – I hear you about the defensive language. You’ve put your finger on one of the other horns of this dilemma.
To me, a defensive asset is one that lowers downside portfolio volatility. That doesn’t mean the asset itself isn’t volatile. It just tends to zig when equities zag right off a cliff. Or at least it zags less badly when equities make like a lemming.
(Any asset also has to earn its keep by delivering a real long-term return.)
But people hate it when the individual components suffer prolonged downturns. So volatile assets get ditched.
The asset that seems to get a free pass is cash as its losses are invisible unless you pop on your inflation-adjusted specs.
Maybe there’s mileage in talking about alternatives – though that term is clear as mud to me in that it’s populated by a medicine show of assets making all kinds of claims.
@Oldie – I agree with your sentiment. Where I’ve updated my thinking is that the traditional 40% doesn’t achieve anywhere near real term growth during rising rate eras.
I’d be happy with say a 0.5% annualised return, but bonds and cash are capable of inflicting real-terms losses for 20 to 30 years. Essentially across the entire time horizon of an unlucky accumulator or retiree.
The only way back to achieving a minimal rate of real growth (in the 40%) is with reference to a long-term average – when the bad decades are smoothed out by the good.
But the individual investor can’t assume that average. They’re stuck with whatever fortune decrees.
Is there a way around it? Yes. Primarily by not taking an implicit bet on living through a disinflationary era. By diversifying across assets that protect you during the recurring rising rate / inflationary eras.
@Martin T – You are right to lambast me on my failure to finish the derisking series. I am sorry about that.
To cut a long story short, I spent a lot of time building spreadsheets that enabled me to better answer the derisking question i.e. which portfolio blends best thread the needle.
Now I’ve got those spreadsheets, a lot of issues are jumping out of the data at me and bonking me on the head like never before. This was one of them.
In a sense, the evidence is pointing in the same direction. i.e. what if you’re derisking in a rising rate era and not a benign falling rate era? So I feel like I’m going to have a better answer for the derisking dilemma by the time I go back to it, which I will.
Anyhow, you’re right to call me out on it. I’d also like to blame TI for his insatiable demand for weekly content or death! Then again, I like to blame TI for a lot of things and not always 100% fairly 😉
@dearieme – seems like a different topic to me. Moreover, doesn’t seem like a massive risk. I’ve got to imagine a precipitous decline in UK house values, actually needing the care, living long enough in care that the costs exceeds the value of all assets, the disappearance of social provision. It’s an interesting topic and there’s lots to think about there.
Are many people 60/40 tilted towards UK property values when the value of the State Pension across a lifetime is properly valued? Is that a bad place to be? And sure, you could sell your house or equity release it if you were somehow betting on the decline of UK property prices relative to other assets as a hedge against social care. Still, seems like a big call to me.
Great piece, which goes to the heart of perhaps the biggest investing dilemma of our times for regular investors. You’re doing great work, and I look forward to part 2 with bated breath!
My own experience is that, while I made the call that bonds were overvalued a few years back so managed to avoid the worst of the Truss-triggered bond market rout, my alternative hedge for potential equity-market losses – i.e. property – means I’m currently stuck with investments in a now-closed property fund that’s being unwound as we speak. I’ll be interested to see in retrospect whether it was in fact a better choice than bonds !
Good article, thank you. Interesting comments too.
I am in retirement and am about 50% equities and index linked stuff ( direct and in etfs).
For bond allocation I have read that active does pay off over passive so I may buy a strategic bond fund.
As per comment above, inflation plus 1% would also suit me fine. My main priority is avoiding ‘permanent ‘ loss of capital. Given my age I have a relatively short spending time frame so ‘permanent’ needs to be viewed in that perspective. Recovery after 5 years plus isn’t the consolation it would be for a 40 year old.
I am surprised no-one has mentioned annuities but I guess it is an investment blog!
As an aside I have found an interest and free investment book on the bond side of things which I found informative
https://www.jdawiseman.com/books/pricing-money/Pricing_Money_JDAWiseman.html
@The Accumulator – Fidelity are showing 6.38% for VLS60 using 5 years so a bit better then their own site but not by much.
Also while talking about ready made multi asset funds the same day as your article Trustnet did a story/chart of which funds over the last 10 years have done best at avoiding the bottom quartile.
Would agree with others that in retirement the cheap multi-index 60/40 ish funds can do a job when maybe you no longer want to invest time & effort into running it. But maybe why 60/40 is getting a bit of a bad rep (maybe more so if using funds?) over the last couple of years is that because it had worked and was then being suggested for everybody even younger people.You could not look at a MSE post without VLS being the answer (or HSBC global strategy at a pinch) as set & forget and cheap.Maybe now whats happening is some people especially when younger are questioning with hindsight why they did not go all equity or tech etc? where if you are older you are happy just to tick over come what may?
You ask about viable funds with different assets which are not correlated which i guess might mean different things to different people (and maybe not that uncorrelated) and as you say they maybe don’t have a big allocation anyway and also come with high fees – a no-no to many.
But if i was to break every rule to follow the star funds based on previous performance,fees and cherry picked performance figures etc,the likes of Aegon diversified,Artemis distribution and Orbis Balanced (been a winner with Gold so the future might test them?) which i looked at for figures (among others) seem to have a different mix but results that do stand up over at least 10 years. Even for lower fees L&G do a multi index income range which is slightly different to their normal more well known index range and which my wife used.
At the moment a mix of global etfs income & growth and cheap short term fixed income funds (prefer active) seems fine but you have got me wondering.
Excellent piece @TA. Scary that 1947-74 regime.
My grandfather (a self employed/ businesses owner), who sold up and retired at 54 in 1958, was scarred for the rest of his life (he died in 1995) by the inflation and high rates / bond drawdown of the 1970s.
In 1947 the debt to GDP ratio was (depending on how quantified) in the 200% to 250% range, compared to below 40% by the mid 1990s, its post war low point.
The financial exertions of wars in 1914-18 and 1939-45, and the depressions of both the early 1920s and the early to mid 1930s, set up a whole new regime for bonds by the time of the 1947 financial crisis.
Given how long each regime has lasted since at least 1900, if not since the Revolutionary and Napoleonic Wars of 1792-1815 onwards; are we since 2020-21 in a new regime that could last to the 2050s or even 2060s????
TA, when you looked at commodity funds you didn’t seem to look at ROLG. I wondered if there was a reason for that ( it has since been recommended via a FT article).
@KLJ – Thank you for your thoughts and insights. This is all great perspective for me.
Re: Fidelity numbers: 6.38% annualised is shockingly wrong. Just looked at the cumulative return chart on Fidelity’s site and it shows the same numbers as Vanguard and Morningstar – which translate into 5.61 annualised. To my eyes, that’s not a bit wrong. It’s 14% too high per year over 5 years!
The thing about the 60/40 is that it’s always been sold in as an accumulator’s portfolio. it was when I started and it’s become widely accepted as the default solution.
The issue for me is that it’s an implicit bet on a disinflationary regime. When economic history shows us we pass through cycles of disinflation and rising inflation. The even bigger issue for me is that many people are making a bet without realising it.
The story is the 60/40 has been great over the past 50 years and the past 125 years – so what’s the problem?
But it turns out the past 125 years is a game of two halves. In one half the 60/40 played a blinder but in the other half it played a stinker.
Now we don’t know what’s coming next but there are reasons to believe it may not suit the 60/40.
In principle, the fix is relatively easy for a multi-asset fund to make. Many of them nod to it right now but only performatively.
I think the fix is pretty hard for individuals to make.
I also question why fund providers with easy access to the data haven’t made all of this abundantly clear and issued products to match.
Paul_a38 – I’ve just looked back at my notes and spreadsheet from back when I compared commodity ETFs in 2023: https://monevator.com/best-commodities-etf/
ROLG was there but didn’t make my shortlist because it only had 5 years worth of data at the time, and wasn’t pulling up any trees vs rivals with a longer track record.
I’ve just checked it out again and ROLG looks very good over the past 5 years. Though when I push the comparison back to its inception date (Sep 2018) it settles back into the pack.
In sum, ROLG looks very good over 5 years, good over 7 but not exceptional. It also changed index in 2022, so it’d be worth digging into that to see if there’s something about its current index that’s giving it a boost.
If index construction means that ROLG copes well with a wide variety of conditions then I’m very interested. If it’s only a temporary advantage then not so much.
What was the FT’s rationale for recommendation? Would you mind sending me the link if you have it handy?
@TA #24
>You are right to lambast me on my failure to finish the derisking series. I am sorry about that.
>I’d also like to blame TI for his insatiable demand for weekly content or death!
Thought I’d better stick up for you getting pressure from all sides! Do they know this is meant to be a pastime/hobby – you’re now meant to be RE (or at least semi-RE anyway) and no longer on the daily treadmill, was slavery not abolished a few years ago?!
You are about quality, well considered articles and most would much rather have those than a greater quantity of mediocre ones churned out rapido. Not having time to breathe/think/drink tea/smell the roses in the garden/look out the window for a while may lead to poorly conceived/thought out arguments and there is enough of that rubbish online as it is.
So keep up your good work and as @ermine often advises – go easy on yourself/enjoy the present/stress is not healthy – you wanna be RE (but not in REsus). You’re no longer working for the man! Just my thoughts, all the best.
@TA it came up in the comments section of an article, I’ll try and find it. Think it was the same article as gave the link to the free book.
@The Accumulator – I picked VLS6o to be neutral and now have myself wondering/worried if as a semi-novice investor i do understand performance figures! But i have always used annualised mainly from Fidelity who i think use Morningstar for their data as my guide.
I guess it could be that each platform might use a different date period i.e year or end of month or YTD etc. But AJ bell have your 5.61% as well – but the FT seems to have the same as Fidelity by a gnat’s c**k (i know not investment lingo)
If i just look at the cumulative return over 5 years on Vanguards own site given as 31.4% and just simply divide by 5 you get virtually the same annualised return as Fidelity and the FT are showing?
Guess i am going wrong somewhere so I shall retire quietly to the sidelines and check a couple of books tonight.
“The issue for me is that it’s an implicit bet on a disinflationary regime”: @TA (#30): that’s absolutely the crux of it, and much else besides. The big question is, is this a rising liquidity (lowering inflation and rates) or a falling liquidity (higher inflation and rates) regime? What works in one fails in the other, and vice versa.
I hope the link below aids the important discussion and not distracts for it.
https://www.morningstar.com/news/marketwatch/20260501154/why-the-6040-portfolio-is-crushing-it-despite-market-chaos-and-inflation-fears
@TA. It was discussed in the comments here
How to shield your money from inflation – https://giftarticle.ft.com/giftarticle/actions/redeem/f1b71b02-12aa-4f50-9110-92fecd094318 via @FT
I had a quick look at ROLG and had to go to a description of the index to try to gather its holdings.
From memory the breadth of holdings looked rather narrow ( to my inexperienced eyes) so I went back to your article to see what you reckoned but it wasn’t there.
I have previously used your take on commodities when I invested so thank you.
At the moment, with precious metals seeming to slide ( gold seems to be struggling to hold on to $4500) and the risk that a settlement in the gulf could let the air out of oil, commodities seem to be abit more risky than usual.
However it’s opinions like that that paralyse my investment decisions !
@KLJ and TA on Lifestrategy 60% –
Performance differences like these are normally subtle differences in definitions.
Vanguard themselves are clear their performance figures are to end-April, and I can match that 5.6% annualised using the historical prices page on the FT.
The 6.4% appears to be from the very latest prices, something like yesterday’s price compared to the same 5 years ago.
So, similar to the main thrust of TA’s article, be careful which time window you rely on…
@LCD thanks – was hoping that was the answer
I wonder if you have a view on some of the defensive investment trusts? I have a largely passive portfolio with a global index fund as my biggest holding but my second biggest holding is Personal Assets Trust which has a meaningful allocation to gold and a lot of index linked bonds; this seems better to me than a purely passive approach to defensive assets such as a Vanguard LifeStrategy fund. However I’m also in the fortunate position of having most of my pension assets in DB schemes so can afford to take risks with a modest additional investment portfolio.
Very interesting and useful article, thanks.
I wonder what 100% equities but fully diversified among global equity markets and across styles and factors would look like.
@Baron #18 – Thanks I’ll have a look.
@Paul_a38 – some caution about active bond funds.
Whenever I looked under the hood of these things, I found
– higher duration risk than their benchmark index
– higher credit risk
– and a slug of intransparent constructs like MBS (of GFC fame) and such.
E.g. my father has a “bond” fund that is almost 40% in stocks, and the bonds are, as far as the factsheet tells, mostly Italy govt, Italian banks, France govt etc. Decent performance, but not what you want to rely on in a crisis.
And there is a case for holding individual bonds to maturity instead of bond funds. Monevator explained this; I think the gist is that the fund structure amplifies duration when rates are on a long trend upwards.
Capital Gearing Trust? 44% in index linked gilts and TIPS, all short duration and can be held to maturity if the manager wishes, 17% in govt bonds, again short duration, some credit and about 25% in equities. It’s a very inflation-aware construction.
@TA – looking at the breakeven rates on UK index-linked gilts at the moment, it seems the market is not anticipating runaway inflation and looking at the duration premium of linkers it seems the market is not expecting long term inflationary or rising rate environment. You may be suspicious of the motivations of Vanguard with their multiasset funds, but GEMMs and bond traders have no reason to downplay the risks. How do you square this with your own expectations set out in the article?
@Baron – Market expectations aren’t predictions.
In 2020, real yields were negative. Within months they were positive and inflicted the greatest losses on gilts since WW1.
Nominal bonds include an inflation premium i.e. the market’s best guess of the toll inflation will take. Yet one of the main reasons rates rise is because the market consistently underestimates the future path of inflation. They respond by demanding a higher yield, inflicting a capital loss on existing bonds.
The academic term for ruinous runaway inflation is: “Unexpected inflation.”
So I don’t take much comfort in market expectations. What’s known is priced in. What’s unknown bites us in the backside.
We already know this about the stock market, right? We understand it looks highly valued, it looks frothy etc. Does that tell us if we’re actually headed for a crash? It does not. The US market has defied expected returns for over 15 years.
Lastly, I’m not making a prediction or even setting out an expectation. I’m asking a very simple question: Why wouldn’t you choose a portfolio that defends against the full range of threats?
@LCD and KLJ – Cheers! Glad to get to the bottom of that one. Sanity restored! Thank you for doing the due diligence @LCD 🙂
@TA – Point well made about markets attempting to include the known knowns and known unknowns but not the unknown unknowns. “No one expects the Spanish Inquisition!” Ta-da!
I guess the other simple question is why humans persist on selling low (“this market is awful, let’s de-risk”) and buying high (“the market has recovered, lets get back in”) which we could also resolve by choosing a portfolio prepared for all market conditions.
Lastly we want to avoid throwing out the baby with the bathwater and creating so much anxiety around 60/40 that it puts people off investing. Buying LifeStrategy 60/40 is still better than post-office savings. Just we might want to buy 80% LifeStrategy 60/40 plus another 20% of liquid alternatives (waiting for part 2), or some such arrangement.
And of course accumulation phase will be different to decumulation phase (I mainly forget to think about accumulation these days, surely they are just all in 100% equity and HODLing??).
I wrote this article from the perspective of an accumulator who’s left adrift by a portfolio that falls far short of the long-term average return.
However, the same rising rate phenomenon poses significant problems for retirees and derisking accumulators who are deprioritising growth in exchange for wealth preservation.
Perhaps the main problem for deriskers holding the 60/40 is a major inflationary shock like 1915-1920 or 1973-74 pushing their retirement out of reach. The portfolio loses 40-50% in real terms.
Recovery times are 9 to 16 years from start of the bear to breakeven in real terms.
These events are much more damaging and long-lasting than the falling rate, demand-slump equivalents for 60/40 owners.
For retirees, the problem is again that the long-term average return during a rising rate regime conceals interminable periods of slow losses, or short periods of catastrophic losses, or both. Either one of which can fatally damage a retirement portfolio.
A while back, I wrote this piece on the UK’s worst retirement paths, when a modest SWR failed to protect a 60/40 portfolio from running out of money:
https://monevator.com/whats-the-safe-withdrawal-rate-danger-zone/
Now I look at that piece again, I see that the fail scenarios all took place during rising rate regimes.
One of the paths is a catastrophic start, but they’re outnumbered by the long, slow terminal decline paths.
I have been grappling with this recently too and I have taken interest in the Golden ratio portfolio which has been described as a decummulation portfolio.
https://portfolioslab.com/portfolio/sjuez1ojfi956takei9pv0s0
https://portfoliocharts.com/portfolios/golden-ratio-portfolio/
https://www.lazyportfolioetf.com/allocation/frank-vasquez-golden-ratio-portfolio/
With the comment at the end of the lazyportfolio site stating
“No other portfolio in our database granted a higher return over and a less severe drawdown at the same time.”
In practical cases, it is not just returns but sequence of returns (definitely for accumulation, although in retirement it depends on the withdrawal approach adopted) that can affect the outcomes. For example, in retirement holding bills (as a proxy for cash) or long bonds often either turned out to be best or worst (depending on rising or falling rates), while holding intermediate bonds (0 to 10 year, 5 to 10 year or 5 to 15 year gilt funds) tended to steer a course between the extremes. Some historical results can be found in my papers at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4742456 and https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4827947
In a 40 year accumulation, only the first year’s contribution is held for 40 years, while the contribution made in the second year is held for 39 years, etc.. Coupled with rebalancing, this makes the asset allocation that provides the largest final portfolio value (if that is the goal) harder to assess purely from the returns over the 40 year period. For example, the accumulator starting in 1947 would have seen gilts with higher yields as the period progressed. AFAIK, the truly horrendous inflation of the 1970s and 1980s that then destroyed nominal income was not predicted in advance (e.g., there’s an interesting paper by R.J. Gordon, Can the Inflation of the 1970s be Explained? written in 1977). Similarly, for the modern accumulator, using ILGs to gradually build a ladder of income flooring for retirement is much more attractive now with 2% real yields than it was 5 or 6 years ago at -2% or worse.
While it is not exactly a 60/40 portfolio, I note that Graham’s book (The Intelligent Investor) suggested a 50/50 portfolio as a default position – so there is a longish history (1949 onwards?) for the middling sort of portfolio.
@Baron – Cheers and thanks for pushing me on all of this stuff. I think the debate is very helpful.
I totally agree about not wanting to put people off investing.
At the same time, Monevator is a community dedicated to helping people to learn more about investing. So I feel it’s incumbent upon me and the site to point out the risks. I hope that by also talking about the potential solutions, people feel empowered to do something about it rather than just alarmed.
One of the things that’s driving this, is that if we don’t talk about the risks then people find out the hard way.
AIUI, the response to the bond crash of 2022 was for people to default to cash. Because they had been told bonds were “safe” and then they weren’t. (We flagged the risk on Monevator ahead of time but, hey, we’re only a small site and our voice is just lost in the wind.) Cash alone is no solution.
I’ve always feared much the same will happen one day with equities. Like you say, many people are 100% stocks. But I bet that strategy is gonna look a lot less appealing after the next big crash.
Someone knowledgeable (forgot where I read this) pointed out that breakeven rates are a very tenuous indicator of the market’s inflation expectations. Other factors drive linker prices too e.g. simple supply/demand.
Bond guru Bill Gross wrote in the FT yesterday that TIPS are still bad value given the risks. What do I know. At least it’s not crazy anymore to buy linkers at ~2% real yields. In Dec 2021, TR46 guaranteed a 49% loss of purchasing power to maturity.
@Sparschwein — I don’t think Gross is saying that exactly. He’s saying that the real yield on TIPS has risen towards 3% not because of inflation but because of higher real interest rate risk, on account of general US decline (/debt and deficit growth) capped by (twice) giving the keys to Trump, who has made literally every aspect of US hegemonic power weaker.
Agree with your other comments. As I’ve written many times, the bad bond returns in 2022 weren’t unexpected as such, what was savage about them was they all came at once. Investors who owned bonds for stability found the ’40’ a suddenly concrete liability for their returns.
The flipside is that after that reset longer duration Linkers now offer 2%+ real yields for decades to come. But that YTM could still be volatile with interest rate moves.
As for nominal gilts, again they look much more attractive than five years ago. The risks were and are always there, but the pricing (aka the attempt to factor in those risks) changes.
Set against that, as TA has shown in his graphs above, if we are in for a longer-term rising interest rate regime then in real terms your bond allocation could still do poorly even at these higher yields, if the historical record is a guide.
Hence as I understand it his quest to establish a more diversified portfolio than the 60/40 that can ride out more/most of these potential futures.
In practice, of course, we’ll live through just one timeline. And in hindsight you’ll probably regret owning some of those assets.
Who knows, maybe even US equities?! Seems hard to believe, but then so do the share prices of semiconductor stocks right now.
And it’s not like a multi-decade stock market drawdown has never happened before. Especially, again, in real terms.
Again our (un)lucky lot in life is to live through just one of these sequences of returns (as Alan S says).
Weighting your portfolio in case of others happening is akin to buying fire insurance for your house. It doesn’t mean you hope or want a fire. 🙂
Okay, ramble from an active investing renegade over.
@Jon – Ha. Thanks for sticking up for me! I’m expecting my next Monevator 360 appraisal to be pretty rough so I’ll be quoting your comments extensively in my defence 😉
@Oldie – Re: that article. What do you take from it?
“The inflation threat bonds face isn’t from expected inflation but from unexpected inflation. And by definition unexpected inflation is just that – unexpected.
Crill says there’s no more reason now to avoid the 60/40 portfolio because of concern about what inflation would do to bonds.”
Well, there is if the 60/40 portfolio doesn’t defend against unexpected inflation, no?
This article reads like industry gaslighting to me.
Point 3: Don’t bother diversifying out of nominal bonds because buffered ETFs. WTF?
@Paul_a38 – cheers for the article. The commenters are spot on about linkers: hold ‘em to maturity and you’ve got yourself an inflation hedge. No need to worry about price fluctuations.
Re: ROLG – I’d like to take a good look at the index before commenting any further. It was on my list of BCOM replacements which essentially means it uses a 2nd generation index and it’s certainly performed perfectly well vs any of my other candidates over its lifespan i.e. the past 7 years. It’s probably time for me to update that article in light of the past three years anyway.
Re: commodities risk: bear in mind they’re one of the wildest rides you can be on, come what may. Don’t know if you saw this piece:
https://monevator.com/commodities-are-working/
The slumps are long and deep, the upswings sudden and shocking. They’re just nuts.
It took me a long time to decide I could deal with it. I wasn’t thrilled that I bought in after the 2021-22 commodities run-up but hey that kind of thinking made me miss out on huge gains in gold previously. So I’ve just bought what I need and I’ll leave the rest to the fates.
@Perikles – Personal Assets Trust is on my candidate list. Thank you for mentioning. Are there any other defensive investment trusts you like the look of, along similar lines?
@PPYS – It’ll look great re: long-run averages. But 100% equities is a huge risk, typically only exacerbated by risk factor holdings. It could scupper you if you’re near retirement and need to hit a number. It could drive your portfolio into the ground or make you very rich depending on what year you retire. It’s a solution that conceals many hidden pitfalls.
@Zonekey – Thank you, looks well worth a deeper dive.
@Chuckie B – Yes, this is the sort of thing. It’s well diversified. It’s also likely optimised to win a historical returns backtest so I wouldn’t feel bound by those particular percentages or the inclusion of say small cap value or long bonds. But that’s a bigger conversation. It’s essentially an all-weather portfolio variant: https://monevator.com/asset-allocation-for-all-weathers/
“And by definition unexpected inflation is just that – unexpected.”
Unexpected by whom? The MPC of the Bank of England has a worse record on predicting inflation than I have and I use, metaphorically, chicken entrails and drying seaweed.
I’m tempted to draw the conclusion that since macroeconomics is balls then inevitably macroeconomic predictions will be balls too.
@TI – Gross’ piece was very interesting, one of the few attempts I’ve seen to explain why real rates have shot up as much. US decline makes sense as one driving force. Surely there are other factors… The rise of China, high govt debt, Trump I were all in place before 2021. The same happened across Europe too.
Gross writes “Yields on 30-year Treasury bonds (..) at around 5.03 per cent still appear expensive relative to historic norms when compared with expected inflation. A 30-year TIP, or Treasury inflation-protected security, yields only 2.72 per cent…”
I understand this as, Gross doesn’t like treasuries and TIPS at today’s prices.
Maybe I’m misreading it.
Anyway, I’ve been buying linkers recently. I think 2% real is not bad, and the plan is to hold them to maturity. I can also see a scenario where real yields drop again. It is certainly in governments’ interests to push them down; if they have the tools to do so I’m not sure.
@Sparschwein — I agree he doesn’t like nominal Treasuries. I don’t think he’s saying quite the same thing about TIPS. But maybe I’m just seeing it through my own lens 🙂
It’s worth remembering that US yields have ‘shot up’ to a level where they still look pretty/very low for most of the past 80 years:
https://www.macrotrends.net/2016/10-year-treasury-bond-rate-yield-chart
Of course, as @TA says in his piece one way to interpret this fast move upwards is that we’ve entered a new regime of rising rates. There have clearly been such periods in the past.
On the other hand, maybe near-zero after the GFC and then the final hurrah of the pandemic and never-before-seen negative yields were an aberration, and we’re getting back to where we’d have been absent both things?
Clearly most of us (maybe all of us!) are not well-placed to call it except through luck. Hence the diversification argument.
For my part, I’d try to avoid getting wedded to any particular narrative given all these unusual factors. 🙂
@TI – that’s a crazy bond run from 1981-2020. No wonder 60/40 was a good bet for decades.
> avoid getting wedded to any particular narrative – I agree, I just have the annoying habit of asking “but why” a lot :-p
And the direction of real rates is one of these “but why’s” I have never seen a complete and convincing explanation for. After the GFC the prevailing gospel was, demography and savings glut lead to permanently low rates. So from 2020-22 demography flipped and the savings evaporated?? Or it’s all down to QE/QT, but central banks claim their effect on long rates is less than a percentage point.
But why?
@Sparschwein — Well, structurally speaking, pre-versus-post GFC has moved a lot of debt off company and household balance sheets in the West and on to government balance sheets. That’s real, and giving that governments are the ones issuing Gilts and Treasuries and whatnot you can see a borrower (i.e. a gilt/treasury buyer) might demand a higher income for the extra risk of the extra debt. (Yes the US and UK can print money, but that’s not a free lunch. It could mean default by inflation etc).
I’m no expert on this stuff though and we’re drifting away from the passive approach to known-unknowns, so I’ll bow out here I think. 🙂
@Sparschwein 43. Thanks. They are also not particularly low cost. However a couple did quite well* in the 2022 bug out so in the interest of diversity I wonder if a small allocation would be OK.
*ie they didn’t lose too much
Salutations de France.
While the investment world’s moved on in other ways from Markowitz’s 1952 OG banger “Portfolio Selection” (Journal of Finance, Vol. 7, P. 77); given that the efficient frontier still reigns supreme, at least within some limit, then surely we all also need to move on now from just considering only cap weighted global stocks and UK government bonds????
What’s the optimum portfolio mix (levered and unlevered) for any given metric: CAGR, money in to money out, maximum draw down, maximum time to recovery, value at risk & other volatility measures, skewness, risk of irrecoverable loss of capital, sequence of return risk, and Monte Carlo distribution?
In these regards, Morning Star have recently (14th April 2026) published their “2026 Diversification Landscape” as a 63 page PDF.
What are you trying to achieve?
How does each part of your portfolio help?
What threats stand in your way?
How do the component parts of your portfolio protect you?
How likely is it that each part will work as advertised?
Are there specific conditions that will undo your strategy? Both financial and personal.
What are your assumptions?
What are the costs?
What’s the evidence?
Do you understand what you’re buying into?
Is the strategy suitable for you and your circumstances?
Can you stick with it?
Je suis d’accord @TA. Indeed, I’d actually amplify your questions.
All our questions (yours and mine) boil down to Repeatability and Execution.
Repeatability includes (at an absolute minimum) both a) robustness over different regime typologies (i.e. also low and falling liquidity with high and rising voltaility, and not just high and rising liquidity with low and falling volatility), and, in addition, b) robustness over different return profiles (sequences of returns).
Ideally a strategy should be anti-fragile, and not merely survive in adverse macro economic environments, but actually thrive and become stronger.
Execution is both the ease of and the ability to access the means of delivery of the portfolio design and / or strategy methodology.
For my own part, as (IIRC) I’d commented on previously to @SkinnyJames (in the thread to “Yes, you can eat risk adjusted returns”), I’ve thus far provisionally concluded that the ‘best’ currently available (for a UK retail investor on a major platform) portfolio, based upon using an efficient frontier model with MSCI data going back to 1970 (and as adapted for present moment UCITS ETF and OEIC availability), and choosing to target the same volatility as with a 100% Global Equities portfolio (but with appreciably higher returns being sustained historically than for such a portfolio) would be: approximately 40% into Winton Trend Enhanced Global Equity Fund (Accumulation, GBP hedged), 20% into either of WGEC ETF or IWMO ETF, and the last 40% into AVSG ETF; all then rebalanced annually in January (with a greater of either 20% variance from target weighting or a maximum drift of 5% of portfolio tolerance band for the rebalance).
@TI – so I quizzed ChatGPT5.5 about the real rates mystery and things are becoming clearer. Impressive what it can do. One interesting upshot is that bouts of inflation do not necessarily lead to a jump in real rates, there are several examples when this didn’t happen.
“Final narrowed explanation:
The 2021 to 2022 jump in US real yields can be explained with three points.
1. Markets radically revised the expected real Fed policy path.
This is the dominant explanation.
Inflation proved persistent, labour markets remained tight, and the Ukraine shock increased food and energy prices. The expected Fed policy path shifted dramatically upward. With it, an enormous jump in real rates at the short end.
2. The end of QE and expected QT raised long-end yields further.
This mattered before QT actually began because markets price future balance-sheet policy in advance.
The effect was meaningful but likely measured in tens of basis points.
3. A higher real term premium explains part of the remaining long-end move.
Investors demanded more compensation for holding long-duration bonds in a more uncertain policy environment. (The Fed’s June 2022 report noted that uncertainty about longer-term rates, measured through options on 10-year swaps, increased significantly and reportedly reflected uncertainty about the policy outlook.)” This is about the price risk for TIPS if the Fed has to push real rates higher in the future.
Another interesting point:
“Concerns about a literal US fiscal default have contributed only modestly to long-term real yields. They are visible around debt-ceiling episodes, but the pricing effect is concentrated in Treasury bills maturing near the expected “X-date” and in sovereign CDS contracts.
The much more important fiscal contribution to elevated 10-, 20-, and 30-year TIPS yields is different:
Investors expect the private market to absorb a larger and persistently growing stock of Treasury debt, while becoming less confident that the fiscal trajectory will stabilize.
That raises the real return needed to clear the market. It does not require investors to believe that the US will fail to repay a 30-year TIPS bond.”
AI slop over 🙂
@Paul_a38 – it’s certainly a feather in the manager’s cap if they reduced duration in 2021. I’d watch out for illiquid stuff in the funds that is simply not marked to market, which creates the illusion of stability.
Active bond funds take on more risk than their benchmark to justify their higher cost. This is fair enough, but does this extra risk make sense in your portfolio? E.g. do you want more duration, or higher credit risk which probably leads to higher correlation with the stock market?
A timely video from Dimensional with some interesting points.
“How to beat inflation with stocks and bonds”
https://youtu.be/AqSh_gZkAqM?si=TzMpQ1SwNcBIofFb
Some of these we already discussed
1. Market Prices Already Account for Expected Inflation
2. Hedging vs. Outpacing Inflation
3. TIPS and/or Inflation Swaps
4. Gold, Commodities, and Bitcoin are Poor “Hedges”
5. Stocks and Nominal Bonds Excellent for “Outpacing” Inflation
@Baron (#67)
“5. Stocks and Nominal Bonds Excellent for “Outpacing” Inflation”
This depends on the holding period, the historical period, and the country. For example, for UK equities rolling periods (using data from 1872 to 2025) of 25 years or greater were necessary to ensure positive real returns. For long gilts, even a 60 year rolling period was insufficient to always have positive real returns, while for shorter gilts (0-10 years) 60 years was just sufficient to ensure positive real returns.
Obviously the results for different countries (including the US) were different.
@Baron @Alan S — Indeed, I have written about the difference between beating versus hedging inflation before:
https://monevator.com/beating-inflation/
For most investors most of the time I personally think beating inflation is more important than hedging inflation, at least at the portfolio level. (Income that you need to live on is another issue).
However if you’re in drawdown or you have some other reason to have a shorter time horizon re: portfolio volatility (in nominal terms) then ‘hedging’ may be a more important consideration.
This is a bit tangential to the article though, which as I understand the aim is to look for a way to make the defensive portion of the portfolio more defensive, not to add extra risk to the risky (60) side.
Equities generally do better than everything, but as @Alan S shows here and @TA has many times before, for some periods they really *really* don’t, which is the justification for the ’40’ in the first place. 🙂
This article is saying that if you use the standard 60/40 portfolio and live through a rising interest rate era then your returns may well be very poor:
1.7% real annualised 1947-1974
-2% real annualised 1898-1920
Compared with the long-term real annualised average of 4%.
The average is achieved by smoothing out the bad eras with the good.
The average enables you to obscure the fact that we can live through prolonged periods that your strategy is ill-suited for.
The long-run is composed of two distinct types of regime. One of which favours the standard 60/40 and one that does not.
We don’t know what type of regime is coming next. Nobody does.
I’d love to be able to go back further and show you what happened in previous rising rate regimes but I don’t have the data. Treat as suspect any related content that doesn’t go as far back as I have, or conceals prolonged periods that are editorially / commercially inconvenient for the organisation that pays for the content.
Re: the DFA video. It’s content marketing. Lo and behold a great way to beat inflation – according to DFA – is their lead product line: US small value.
If you measure from a particular point in history that seems a long time ago, the 1920s, but begs the question: “Why did they choose it?” and “What are they not mentioning?”
Nominal bonds: are terrible at outpacing inflation if you live through the wrong decades.
UK government bonds were underwater from 31 Dec 1934 to 31 Dec 1997 using annual returns. Over 60 years!
https://monevator.com/bond-market-crash/
But yes, I can show them outpacing inflation 1900-2025 = 0.8% real annualised return.
Commodities are excellent for hedging inflation and outpacing inflation but as volatile as equities and difficult to live with.
Gold – it’s just not clear. Certainly very good during its free market era but that cuts off so much of the long-run.
Bitcoin – yes, I concur.
@TA (#70):
Nice summary; says it all really.
Thanks.
@TA (#71)
Re:Small cap vs Large cap
There is an interesting comparison at https://johncbogle.com/speeches/JCB_Morningstar_6-02.pdf that shows there were periods of outperformance by small cap stocks but other periods where they underperformed. IIRC (but I could be wrong), the 1920s start to the data is because that is the earliest that the Fama-French dataset goes back.
Even equities cannot always be relied upon to beat fixed income over shorter periods. For example, the percentage of 30 year rolling periods where equities had a greater return than bonds varied between country (data from macrohistory).
USA 100%
UK 99%
Germany 95%
Japan 85% (most instances where bonds beat equities were for periods starting after 1973)
France 76% (furthermore, virtually all periods starting between 1890 and 1960 had negative real returns for both equities and bonds)
With all the uncertainty over bonds why would a retiree (who are usually reliant on bonds because of a reduced timeframe bother? )surely they ought to to concentrate on top saving cash Isas,They may lose out a little on inflation, but on the whole they would sleep at night
@David – inflation-linked bonds are the closest thing to a safe asset. (There is no perfectly safe asset, and this call may be proven wrong, but it’s not a niche opinion. E.g The Economist and some professors of finance said as much.)
The bonds need to be inflation-linked not nominal; in the same currency as your future spending; and held as individual bonds to maturity, not as a fund. And you’ll want a positive real return, and UK linkers deliver that at the moment. E.g TR40 >2% real, close to the all-time high since 2010.
Cash appears safe, and I need to keep reminding myself that this is a false sense of safety. During bouts of inflation like we’ve had in recent years, no cash ISA keeps up. And the cash is only safe up to FSCS limits anyway, above that it’s a poorly secured loan to the bank, which can go bust.
Practically I’d put up to half my savings in linkers (that’s about the maximum trust I could muster in the UK govt) and otherwise hedge my bets with a mix of global stocks index, gold, cash, trend-following, commodities.
@David – I agree that cash is reassuring psychologically. But real terms losses can be large: for example cash lost 41% from 1970 to 1981.
https://monevator.com/cash-total-returns-a-long-run-index-for-diy-investors/
Unstable Equilibria has a good chart on this:
https://unstableequilibria.substack.com/p/sometimes-sharpe-is-just-a-number
“The all-equity book on the right has the ugly trough, down near $6,100 [from $10,000] in the depths of 2009, compounding to roughly $85,000 at 11.3%. The 60/40 compounds at 8.3% and lands you around $50,000. The 60/40 spared you a drawdown of roughly $2,000 and cost you roughly $35,000 of terminal wealth. 350% of your original investment.
That’s what the smooth ride Sharpe cost you. The drawdown it spared you, the entire thing you were buying, was worth $2,000, and that would only have materialized if you panic sold at the bottom. You paid $35k to dodge a $2k loss you never had to take. “
@platformer It’s good there are different opinions since I disagree with you completely and entirely. That 35k is not yours, since you are dead at the end. I would take the smoother ride with lower value at mortality any day of the week. Makes Die With Zero much easier and stress free.
@Accumulator, I hesitate to ask, you say (make good your loss)by reinvesting/holding on to your bonds. Full disclosure VGLS 40%equity ,in time they should make good. Say10 years. Have I got the gist right?
@David a good rule of thumb is 2n-1 years where n is the modified duration of the bond part of your fund.
Hi Baron, to begin with I’m an absolute novice who has just retired from the NHS (medical ) Who found this site purely by happy accident. The only happy accident I ever attended. It says it’s 6.9 (so the bond part falls by that% when rates rise by 1%? Also could you explain 2-1year. Thankyou
So if your bond fund combined duration is 6.9 years then you might have to hold it for 6.9 x 2 – 1 =12.8 years to receive the expected yield in a rising rate environment. Not a hard rule but a rule of thumb. This is the time taken for low yielding bonds to age out of the fund and be replaced by higher yielding bonds so the NAV can recover.
@Baron. Blimey.Thanks for your time. (I’m not sure what else to say)
OK, real-terms breakeven for a 40/60 portfolio during the last rising rate era was 15 years. That’s from the start of the only bear market it encountered until breakeven.
Max loss: 41% 1968-74.
In nominal terms (i.e. what an investor saw if they didn’t account for inflation)
Breakeven: 2 yrs, 5 months
Max loss: 11% 1973-74
Essentially, inflation does all the damage.
If I choose 40/60 World equities/cash, real-terms:
Breakeven: 17 yrs, 9 months
Max loss: 44% 1968-80
The problem with the averages is they smooth away the highs and lows. But the investing record is one long ticker tape of highs and lows.
I hope we live through more highs but I think we should diversify against the plausible lows.
LifeStrategy alone doesn’t have enough inflation protection. If you’re in receipt of the State Pension then that amount is inflation-protected. And if you have a defined benefit NHS pension then I think that should be?
So all of that income is acting like an index-linked bond that can’t take a capital loss.
If that element covers your essential outgoings then you’re already there or thereabouts 🙂