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The 60/40 Portfolio: Does It Still Work in an Era of Inflation?

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Key takeaways

The 60/40 portfolio — 60% in global equities and 40% in bonds — was considered for decades to be the ideal compromise between return and stability. 2022 brutally tested that assumption.

Why 60/40 worked for 40 years

From 1980 to 2021, interest rates were falling. That was excellent for bonds (their price rises when rates fall) and simultaneously supported equities through cheaper financing. The correlation between equities and bonds was negative: when equities fell (crises of 2000, 2008), bonds rose and stabilised the portfolio. 60/40 acted as a cushion.

2022: the correlation collapse

US inflation reached 9%; the Fed raised rates aggressively. The result: bonds lost 15–20%, equities ~20%. The classic 60/40 portfolio lost ~17% — its worst year since 1937. The negative correlation broke down. The inflation shock hit both classes at once.

Context: One bad year does not mean the strategy has failed. The 60/40 portfolio has delivered an average annual return of ~8.5% since 1980. 2022 was an extreme event, not the rule.

Does 60/40 still work today?

For a moderately risk-tolerant investor with a 10+ year horizon, yes — with caveats. Bonds once again offer real yield (5% in the US) after 2022, and correlations have returned to normal. But if your primary fear is inflation, consider adding:

Alternative for a young investor

If you have a 20+ year horizon, 60/40 is unnecessarily conservative. Raise the equity allocation to 80–90%. Add bonds as you approach retirement. See the 100-minus-age rule and in more detail asset allocation.

FAQ

What is the 60/40 portfolio?

A classic allocation: 60% global equities, 40% bonds. The aim is to balance the potential of equity growth with the stability of bonds. It was the gold standard for moderate investors for decades.

Why did 60/40 fail in 2022?

Inflation and rapid rate rises hit both asset classes simultaneously. Equities lost ~20%, bonds ~15–20%. The negative correlation on which the strategy was built did not hold in an inflation shock.

Is 60/40 still appropriate?

For a moderately risk-tolerant investor with a 10+ year horizon, yes. Bonds once again carry real yield and correlations have normalised. For a young investor with a long horizon, 60/40 is unnecessarily conservative.

How can 60/40 be improved for inflation?

Replace part of the nominal bond allocation with TIPS (inflation-protected bonds), add commodities or REITs as a third asset class. This diversification helps during inflation shocks, which are the classic weakness of 60/40.

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