June 13, 2022

Stocks are having a terrible year so far. But bonds are doing worse.

There’s an old saying on Wall Street, attributed to Andrew Mellon, that says, “Gentlemen prefer bonds.” And over the past 20 years, bonds have been big winners.

Well, it’s all changed in today’s inflationary environment.

Traditionally, the “all-weather” investment allocation for gentlemen and ladies has been the “60/40” portfolio. It’s been the standard bearer for more than four decades. In essence, the theory advises investors place 60% of their assets in stocks and 40% in bonds. This way, you can retire successfully and still sleep well at night.

According to Barron’s, that configuration produced a total return of about 9% per year on average for decades. Plus, it was far less volatile than an all-stock portfolio. But with inflation now surging to 40-year highs and the Federal Reserve dead set on raising interest rates, perhaps significantly, this portfolio is going the way of the extinct dodo bird.

The conventional wisdom says stocks and bonds are negatively correlated. That means they move in opposite directions – when stocks zig, bonds zag. That was true for a long time, but not so much anymore.

The “60/40” portfolio is bleeding red this year, with bonds performing worse than stocks. As of this writing, the 30-year U.S. Treasury Bond Index is down more than 14% over the past 12 months. Conversely, the S&P 500 is down only 4.5%, meaning you’d lose nearly three times more money investing in bonds versus stocks.

Per Bank of America, the “60/40” portfolio is set for a return of -49% this year, based on inflation-adjusted annual returns. Losing half your investment value in one year won’t bring good sleep. So much for bonds’ “safe haven” status and the durability of the 60/40 portfolio.

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