The 60/40 portfolio

Higher inflation not the end of the 60/40 portfolio

July 06, 2023

Four box-and-whiskers charts show the range of potential returns for two portfolios in two scenarios. The traditional global 60/40 portfolio in a baseline scenario has from a 2.4% return at the 5th percentile to a 9.5% return at the 95th percentile, with a median return of 5.8%. The same portfolio in a high inflation, high correlation scenario has from a 2.3% return at the 5th percentile to a 9.4% return at the 95th percentile, with a median return of 5.8%. The 60/40 portfolio that includes inflation-hedging assets in a baseline scenario has from a 2.7% return at the 5th percentile to a 9.3% return at the 95th percentile, with a median return of 5.9%. The 60/40 portfolio that includes inflation-hedging assets in a high inflation, high correlation scenario has from a 2.8% return at the 5th percentile to a 9.5% return at the 95th percentile, with a median return of 6.0%. The ranges were similar across all four charts. A separate table shows other measures of volatility with more divergence. In general, the inflation-hedged portfolio in the baseline scenario has the least volatility, followed by the traditional portfolio in the baseline scenario, followed by the inflation-hedging portfolio in a high inflation, high correlation scenario. The traditional portfolio in a high inflation, high correlation scenario has the highest potential volatility. However, the differences are modest to moderate except when it comes to the worst potential maximum drawdowns, where the differences could diverge by as much as 7 percentage points.
Four box-and-whiskers charts show the range of potential returns for two portfolios in two scenarios. The traditional global 60/40 portfolio in a baseline scenario has from a 2.4% return at the 5th percentile to a 9.5% return at the 95th percentile, with a median return of 5.8%. The same portfolio in a high inflation, high correlation scenario has from a 2.3% return at the 5th percentile to a 9.4% return at the 95th percentile, with a median return of 5.8%. The 60/40 portfolio that includes inflation-hedging assets in a baseline scenario has from a 2.7% return at the 5th percentile to a 9.3% return at the 95th percentile, with a median return of 5.9%. The 60/40 portfolio that includes inflation-hedging assets in a high inflation, high correlation scenario has from a 2.8% return at the 5th percentile to a 9.5% return at the 95th percentile, with a median return of 6.0%. The ranges were similar across all four charts. A separate table shows other measures of volatility with more divergence. In general, the inflation-hedged portfolio in the baseline scenario has the least volatility, followed by the traditional portfolio in the baseline scenario, followed by the inflation-hedging portfolio in a high inflation, high correlation scenario. The traditional portfolio in a high inflation, high correlation scenario has the highest potential volatility. However, the differences are modest to moderate except when it comes to the worst potential maximum drawdowns, where the differences could diverge by as much as 7 percentage points.

Contributors

Ian Kresnak

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