The traditional 60/40 portfolio will likely neither grow in excess of inflation nor provide much downside protection.
About 20 years ago, Treasurys rallied 31% and the Aggregate Index rose 18% as equities fell 49% during the internet bubble collapse. At the start of the pandemic last year, stocks dropped 34%, but Treasurys gained just 5% while the Aggregate Index actually lost 3%.
High-quality bonds earn less than inflation and offer little protection in an equity sell-off, and investors should avoid owning them. However, investment portfolios are not only about long-term growth. For many investors, portfolios are also sources of liquidity to meet expenses. The traditional portfolio of 60% stocks, 40% bonds was meant to solve the twin objectives of long-term capital appreciation and capital preservation. But given today's valuations, that 60/40 portfolio is likely to achieve neither objective, so investors need to change their thinking.
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