The 60/40 Portfolio Is Broken: Return Stacking Might Fix It

PensionCraft • 7 days ago

Original source

What This Video Is About

The video discusses the challenges faced by the traditional 60/40 portfolio, which combines bonds and shares, as the correlation between these assets has changed, particularly with the rise of inflation since 2021. The speaker explores the historical context of bonds and shares, explaining that the negative correlation between them is not a rule but was prevalent in the first 20 years of this century.

Major Ideas Discussed

  • The correlation between bonds and shares is influenced by the type of news that dominates, with growth news pushing shares and bonds in opposite directions and inflation news pushing them in the same direction.
  • Inflation has been the dominant news since 2021, causing bonds to add to losses on shares instead of offsetting them, which increases the risk of a 60/40 portfolio.
  • Return stacking is presented as a strategy to address this issue, involving a fund that gives more than a pound of exposure for every pound invested, with part of it held through futures contracts, freeing up money to be invested in diversifying assets.
  • The strategy uses leverage but is described as return stacking, not risk stacking, with the goal of enhancing returns without significantly increasing risk.
  • Backtesting of return stacking in the US and creation of a UK version using WisdomTree's index history show promising results, with returns of about 10% a year in the US and 9% a year in sterling, compared to 6.5% and 7% for plain 60/40 portfolios, respectively.
  • The composition of the stack, including commodities and gold as alternatives to managed futures, is discussed, with these assets providing inflation and crisis hedges.
  • The performance of a sample portfolio using return stacking is shared, showing an increase of about 28% against 19% for the Life Strategy 60, with the portfolio's ability to mitigate losses during market downturns highlighted.

What to Watch Next

The speaker suggests monitoring the performance of the return stacking strategy over a longer period, including its behavior during stressful events like the 2008 financial crisis, to fully assess its viability as an alternative to traditional portfolio management strategies.