Your 60/40 Portfolio Might Need A Rethink When Stagflation Arrives

Your 60/40 Portfolio Might Need A Rethink When Stagflation Arrives
Stéphane Renevier, CFA

almost 2 years ago1 min

Mentioned in story

Traditional balanced portfolios like the 60/40 (which holds 60% stocks and 40% bonds) are based on the premise that bonds perform well when stocks don’t. And over the past decade, that premise has held up exceptionally well. But this year’s been different, with both at risk of underperformance as the specter of stagflation looms. So let’s look at how you can protect your portfolio in this atypical environment.

The chart above shows the performance of a variety of different replacement assets so far this year, as well as the expected loss they’d undergo in the worst 5% of scenarios. You can see that it would work well to replace your bonds with gold, or safe-haven currencies like the US dollar, the Japanese yen, or the Swiss franc. They won’t necessarily make your portfolio more robust in the worst-case scenario, but they’ve worked a treat as growth has slowed and inflation spiked this year.

Better still, you could replace your US stocks with consumer staples stocks. On top of providing an above-average dividend, consumer staples tend to outperform the broader market in cyclical downturns: everyone still needs toilet paper and ketchup in a recession, after all. In fact, replacing the expensive S&P 500 by consumer staples would have been the decision that would’ve cut your losses the most this year.



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