The '60/40 Portfolio' Is in Real Trouble

The '60/40 portfolio' is in real trouble... Why you want to consider an alternative now... Inflation kills the passive investor... Please prepare... A few options to consider... A housekeeping note...

The '60/40 portfolio' is off to a rough start this year...

This chart and observation about the conventional 60/40 stock-bond portfolio allocation that many passive investors deploy – from technical analyst Willie Delwiche – caught our eye late yesterday. He shared it on Twitter...

60/40 portfolio is off to its worst start in the past 25 years.

There are a lot of lines on the chart, making it difficult to read... but the important one is the short, thicker black line representing the performance of the 60/40 portfolio so far in 2022... in contrast to how it performed in other periods.

In the last 10 years, the traditional 60/40 stock-bond portfolio has returned an average of about 9.7% per year... Thus, many people have come to expect 10% annual returns by simply "doing nothing."

But that's not always what happens... When the markets go down, indexing really hurts passive investors, like in 2008 during the financial crisis...

Today, if the 60/40 strategy is to deliver its average return by the end of this year – or close to it – stocks and bonds have some significant making up to do. Because the allocation is already down about 5% through the first few weeks of 2022...

Now, that is better performance than if you held a basket of mostly Big Tech stocks or only growth names in your portfolio...

But "only" a 5% loss, compared to worse, is a small comfort if you're an index investor and are interested in seeing your money grow... or at the very least, don't want it to lose value.

With the markets down in general, passive investors are down too and could endure more pain... Fortunately, as I (Corey McLaughlin) will share today, we have a few alternatives for anyone to consider... and I will explain the biggest reason why you might want to think of these options for your own investment-allocation decisions.

This is what we've been warning about...

We're thinking specifically of advice given by our colleagues Retirement Millionaire and Income Intelligence editor Dr. David "Doc" Eifrig and 10x Investor editor Mike Barrett...

Here in the Digest over the last year or so, each has warned folks about the threats the current economic environment poses to "conventional" portfolio management... and to following a passive allocation...

If you've been with us for any length of time, you likely understand that a good number of our editors and analysts believe that many stocks have been overvalued recently relative to their fundamentals...

A broad sell-off in stock prices hasn't been unexpected... In fact, it comes with the territory of a "juiced up" market, which is what we have had for the last year or more...

But the 40% part of the 60/40 portfolio ‒ the bonds... and the presumption about the "safety" of bonds ‒ might be even more concerning than anything that might happen with stocks...

A guaranteed way to lose money...

With inflation running high and government bonds – a bedrock of that 60/40 portfolio – yielding less than inflation, Doc held an urgent "Retirement Wake-Up Call" last year and said that you'd be guaranteed to lose money in the years ahead if you didn't take action...

And as I've written before, the No. 1 rule in investing is, or should be... Don't lose money.

It sounds obvious, but by not losing money, you preserve the current value of your portfolio... and also set yourself up for bigger gains in the future by having more capital on hand to put into good, long-term buying opportunities when they arrive.

We shared details in several Digests last summer, including on June 23 and July 1. As I wrote in the latter...

If 40% of a portfolio is dedicated to a low-return asset class that won't keep up with inflation, it's the opposite of safe. They're going to drain your retirement account and purchasing power... before the government does anything about it, if at all.

As Doc said during his wake-up call, it could take decades to earn all your principal back on a bond purchase. And it's the same story with stocks...

The S&P 500 trading at a "CAPE ratio" [cyclically adjusted price-per-earnings ("P/E"), or Shiller P/E ratio] of 38 times earnings implies it would take 38 years to earn back your purchase price in earnings.

We went on to say...

We can't tell you exactly how stocks and bonds will perform over the next decade... No one can see the future, after all. We can only tell you what we think will happen...

For that reason, Doc is not saying to sell all your stocks or all your bonds. He's just saying that if you're expecting the same old returns from these two massive asset classes over the next decade, you might want to think again...

Specifically, inflation is here... And in Doc's opinion, it's sticking around for a while.

That means you need to consider owning other investments – things like gold, real estate, or other hard assets – more seriously than you might have in the past.

Similarly, back in November 2020, Mike sounded the alarm that the "conventional '60/40' portfolio is dead" for similar reasons... and importantly, he outlined a plan for how long-term investors could prepare for what might be a high-inflation environment in the years ahead.

We're seeing these warnings play out today, as inflation has recently hit new year-over-year highs. The spike might not be done yet... and even it is, inflation could stay elevated in the months, years, and perhaps decade ahead.

Please, make sure you are prepared...

As we've been saying recently, it's critical that at least part of your long-term portfolio be designed specifically to protect against the "evil" effects of inflation, which directly or indirectly can take a bite out of your portfolio and hard-earned savings...

Remember that inflation is a headwind for "conventional" portfolio wisdom... and a factor we haven't seen in decades. And as Doc wrote last summer, just because something has worked in general for 30 years doesn't mean it will this year... or the next.

Now, don't get me wrong... Often lost in the inflation discussion is that owning stocks is actually a great way to protect yourself. But you want to own the right stocks... like shares of capital-efficient companies or in those that have the ability to increase prices and keep making profits.

And you would also be wise to consider "hard assets" that grow in relative value as the dollar becomes less valuable... But how do you know what the right mix is, if the right mix is not the 60/40 "set it and forget it" model that so many investors are using today?

To that point, we have several active alternatives to the '60/40 portfolio'...

And even better if you are strapped for time like many individual investors, none of them will require more than a few updates each year... if anything.

Our Portfolio Solutions products, compiled from our various newsletters and research services, offer several allocations that could take care of this for you based on your own goals and preferences.

Additionally, Doc and his research team have also devised a fully allocated portfolio across broad asset classes... Doc designs this specifically for those looking ahead to retirement. It is an ideal replacement for the conventional 60/40 model.

And, most recently, our colleague Dan Ferris released a special "10-Stock Inflation Protection Portfolio" that is designed to do just as it sounds. Think of this as an option to hedge against inflation with a portion of your portfolio... maybe around 20%, Dan says.

Last week, Dan's Extreme Value subscribers got first dibs on this model portfolio – and the stocks and ideas you want to consider in a high-inflation environment – and the details are now available for everyone to hear.

Dan sat down recently for an interview with our editor-at-large Daniela Cambone to explain it all. He shares why he's so concerned about the markets today... and talks about his plan to combat the threats to your savings...

Click here to listen and watch Dan's message now.

Finally, one housekeeping note before we go...

Earlier today, our colleague Matt McCall held his very first subscribers-only webinar for The McCall Report readers... He plans on doing these "VIP webinars" about once per quarter, and as Matt put it today in a reminder about the webinar...

As you know, the market has been incredibly volatile over the last few months, and growth and innovation stocks have gotten hit hard. That includes many of the stocks in our portfolio – but I'm not concerned because our long-term thesis hasn't changed a bit.

He talked about why he's not afraid of the recent market volatility... what the financial media isn't telling you... and why he's incredibly excited about the future and about his megatrend investments.

Plus, Matt covered his model portfolio in great detail and answered subscriber questions.

If you're a subscriber to The McCall Report or an Alliance member and missed the notice about it, don't fret... A recording and transcript of the call will be available as soon as it's ready on The McCall Report section of our website.

For everyone else, just know that this is a free bonus for Matt's subscribers and an indication of the type of research and relationship he strives to have with his readers.

To that point, I have more good news...

If you're not a subscriber to Matt's work, stay tuned over the next week or so... He has an exciting new event coming up where he'll explain more about how best to follow his research and put it into action in your portfolio.

Stay tuned for more information on that next week.

Tomorrow Is the Big Day

Stay tuned: An all-new Stansberry Research website is coming tomorrow morning, February 16 (sneak peek below)...

In short, we've totally reimagined the way you see and use our work. Don't worry, all the "old" stuff will still be here... things are simply getting better.

To learn about all the new benefits you'll have access to as a subscriber, click here.

New 52-week highs (as of 2/14/22): Alcoa (AA), Altius Minerals (ALS.TO), Altius Renewable Royalties (ARR.TO), Enstar (ESGR), Innoviva (INVA), and United States Commodity Index Fund (USCI).

In today's mailbag, feedback on Mike Barrett's Monday Digest... and thoughts about our Stansberry Research Investor Terminal, which you can find at StansberryResearch.com tomorrow morning... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"I liked the Monday article about the Boulder County fires. As a resident of Boulder for more than 40 years, I can certainly attest to the winds we have. On December 30, 2021 the winds were alive and kicking, it was actually quite a miserable day. As I recall, I saw smoke from the fires sometime after the lunch hour. By the evening news the so-called experts were already crying climate change. Although I do believe that is certainly a possibility to a small percent, I'm wondering how they can possibly blame these fires completely on climate change. I would love to debate these experts and I really wonder if they do any real research at all.

"Winds are not unique to Boulder. According to NOAA, these wind events of 70 mph plus have occurred 262 times since 1969. But the fact is, they have actually occurred more often in the period from 1969 to 1994 (a 26-year period) than from 1995 to 2021 (a 27-year period). Most of these events are in the months of December and January. Drought is not unique to the area either. It's a high altitude and dry climate on the eastern side of the mountains. The mountains actually suck up the moisture before it reaches us.

"What the experts don't tell you is that what has occurred in the last several decades is that homes are being packed into the area in greater density. I would guess that most of the homes that burned down are less than 30 years old. Back 30 years ago the fires wouldn't have been nearly as bad because there was more open space and more distance between houses. There was even speculation that wooden fences contributed to the fires.

"As a society there are other factors that go into the destruction of property and it can't all be blamed on climate change." – Paid-up subscriber Bob G.

"Please keep your climate opinions to yourself. There have been many natural changes to the earth's atmosphere, etc. over the years that have influenced the climate and that will continue." – Paid-up subscriber Ron S.

"Mike, I am a Theoretical Physicist (Ph.D.). I have looked extensively over the last 15 years at all issues purported to be due to (man-made) climate change. One of the most insidious problems is the manipulation of data by our Federal Government to make 'climate change' look like it's a recent and growing problem. This is patent nonsense.

"Sadly, this is (like COVID) nothing to do with real science. It's about growing power in the Federal Government institutions. The entire CO2/greenhouse gas nonsense has sadly been sold to an uneducated naïve public. Global warming is just another politicized subject being used to control the public and to keep us in constant fear." – Paid-up subscriber Gregg C.

"Hey team, all I can say at this point is 'thank you' for your vision, persistence, and innovation (which is mostly perspiration, I know by experience). Best wishes for a Rockin' Rollout!" – Paid-up subscriber Harvey M.

All the best,

Corey McLaughlin
Baltimore, Maryland
February 15, 2022