The old 60/40 safety net will fail if the next market shock is global inflation
The old 60/40 portfolio can break badly if the next market shock comes from global inflation. That is the ugly part investors are being forced to deal with now. Bonds are expected to form the conservative side of any investment portfolio. Bonds offer stable returns, minimize volatility, and act as an insurance against falling equities and investor risks. These characteristics made the most sense under conditions other than those of inflation. According to Morgan Stanley (NYSE: MS), analyzing nearly 150 years of bond and equity data showed significant issues with this approach. As it turned out, bonds become less of a safe asset when inflation is persistently elevated. The conventional ratio of 60% of stocks to 40% of bonds relies on a single assumption, namely, stocks try to achieve positive long-term returns, whereas bonds are used to minimize negative fluctuations. The validity of this assumption started to be questioned following the equity market peak of late 2021. Inflation makes bonds act less like protection when stocks fall The S&P 500 Total Return Index has climbed far above its early-2022 level. The classic 60/40 portfolio also recovered, but it has not kept up with stocks. The Bloomberg Aggregate Bond Index, which tracks a wide basket of