The End Of The 60/40 Portfolio Explained

Apr. 06, 2020 8:01 AM ETGLD, DBC, SPY, EEM, TLT5 Comments
Ariel Santos-Alborna profile picture
Ariel Santos-Alborna


  • Risk parity has outperformed due to lack of inflation risk and 40 years of the same Fed policy response.
  • As global sovereign bond yields go to zero or lower, capital gains from bonds can no longer hedge against losses in stocks.
  • Investors will have to find alternatives if they do not want to underperform.
  • Investors should consider real assets to hedge against currency devaluation risk and inflation risk from MMT like fiscal policy.

A typical financial advisor will preach that a 60/40 stock/bond portfolio based on Modern Portfolio Theory creates outsized returns with adequate hedging. Risk parity is the institutional equivalent of the main street 60/40 portfolio. With over $1.4 trillion of assets under management, risk parity leverages bond exposure to create equal risk (volatility) based on this notion of anti-correlation. This strategy has yielded an average of 10% since 1980 with 40% less volatility than a pure stock portfolio.

Despite this, Bank of America, Morgan Stanley, and a host of investors worldwide are declaring that the 60/40 portfolio is now obsolete. This article will explain why 60/40 has performed so well in the past four decades, arguing that recency bias in the financial advisor industry is exposing investor capital to more risk than either party understands. Next, it explains why this portfolio is now doomed to underperform. Lastly, it offers an alternative portfolio allocation that I believe will outperform risk parity in the decades to come.

Risk parity and recency bias

The chart below shows the correlation between stocks and bonds since 1883. Historically, bond prices and stock prices are positively correlated 30% of the time and negatively correlated 11% of the time. The other 59% represents moderate correlation with a range bound coefficient between ±2.

(Source: Artemis Capital Management)

The anti-correlation of bond and stock prices began in the 1990s. Therefore, risk parity was able to outperform the broader indexes during the bursting of the tech bubble in 2000 and the GFC in 2008. Yet the chart above makes it clear that for most points in history before 2000, the idea that gains in the bond market will offset losses in the stock market (and vice versa) simply did not hold true. Institutional finance has convinced itself that anti-correlation is a new paradigm and leveraged the entire financial

This article was written by

Ariel Santos-Alborna profile picture
Ariel is author of the book, "Understanding Cryptocurrencies: Bitcoin, Ethereum, and Altcoins as an Asset Class," available on Amazon, Barnes and Noble, or the Business Expert Press website. He has been featured in Forbes and Ariel specializes in macro, Bitcoin, and early stage Web3. In addition to writing investment content, Ariel worked as a product manager and advisor to Web3 startups and investment funds. He is currently an MBA Candidate at Harvard Business School.

Disclosure: I am/we are long GLD, SPY, BTC-USD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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