The 60% Stocks 40% Bonds Portfolio Doesn't Always Work

The Post Covid money printing inflation spike in 2022 exposed the financial investment industry's default 60% stocks 40% bonds portfolio. Investment in Bonds in general achieves two goals: -

• Reduce price volatility

• Act as a counter-balance (or hedge) against falling stock prices

These 2 goals are related of course, as when stocks go down as bond prices go up then naturally, volatility in your overall account will be smoothed out. BUT ...  

This function of bond investing only works in low inflation environments. When inflation is high as in 2022 the relationship and function of stocks to bonds is broken and they both go down in price.

But even when inflation conditions are 'normal' and the standard relationship bonds and stocks is in play, the long term return on bonds is almost guaranteed to be lower than stocks, so my thinking is... why bother?

In my opinion bonds are there to be used as a strategic hedge against a downturn in stocks.

Holding bonds and stocks in a 60/40 portfolio has an inherent flaw in with bonds cancelling out gains made in the stock market as shown by the graph below. This graph shows the performance of the US SP500 stock market index against a 60/40 fund going back 1500 days from the end of 2024. (Admittedly, this is an extreme example as it encompasses the 2022 inflation spike and also the 2023/24 AI spike in the stock market, however, it still illustrates the point. The SP500 is up 24% and the 60/40 fund is net flat for the whole 1500 day timespan )