The popular 60/40 stock-bond split traces its roots to the Wellington Fund during the 1929 crash. Its heavy bond allocation meant it was "crushed way less" than all-equity peers. Its fame grew not from high returns but from superior relative performance during a catastrophe.
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In high-inflation environments, stocks and bonds tend to move in the same direction, nullifying the diversification benefit of the classic 60/40 portfolio. This forces investors to seek non-correlated returns in real assets like infrastructure, energy, and commodities.
The 60/40 portfolio is obsolete because bonds, laden with credit risk, no longer offer safety. A resilient modern portfolio requires a broader mix of uncorrelated assets: cash, gold, currencies, commodities like oil and food, and short-term government debt, while actively avoiding corporate credit.
The key to long-term wealth isn't picking the single best investment, but building a portfolio that can survive a wide range of possible futures. Avoiding catastrophic losses is the most critical element for allowing wealth to compound over time, making risk management paramount.
During profound economic instability, the winning strategy isn't chasing the highest returns, but rather avoiding catastrophic loss. The greatest risks are not missed upside, but holding only cash as inflation erodes its value or relying solely on a paycheck.
Advisors who recommend fixed allocations like 60/40 without considering current expected returns and risk are committing a form of 'malpractice.' Investment decisions must be dynamic, as the relationship between risk and return is not constant over time.
The world's most common balanced portfolio doesn't have a rigorous academic origin. It evolved from the Wellington Fund, created by Walter Morgan in the late 1920s as a bond-heavy strategy to avoid the devastation of a major stock market crash.
Contrary to the retail investor's focus on high-yield funds, the 'smart money' first ensures the safety of their capital. They allocate the majority of their portfolio (50-70%) to secure assets, protecting their core fortune before taking calculated risks with the remainder.
A 50% portfolio loss requires a 100% gain just to break even. The wealthy use low-volatility strategies to protect against massive downturns. By experiencing smaller losses (e.g., -10% vs. -40%), their portfolios recover faster and compound more effectively over the long term.
Marks uses the analogy of a six-foot man drowning in a stream that's five feet deep on average. This illustrates that portfolio construction must account for worst-case scenarios, not just average outcomes. Survival through every market phase, especially the low points, is a prerequisite for reaching long-term goals.
Arguing against the traditional 60/40 portfolio amidst a market mania, Gundlach advises a radically different allocation. He suggests a maximum of 40% in stocks (mostly non-US), 25% in bonds (with non-dollar exposure), 15% in gold and real assets, and the rest in cash.
