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

What This Video Is About

The video discusses the historical context and recent performance of the 60/40 portfolio, which combines stocks and bonds, and explores return stacking as a potential solution to the challenges faced by this traditional portfolio.

Major Ideas Discussed

• The 60/40 portfolio's bond component failed to provide its typical cushioning effect in 2022, with Vanguard's Life Strategy 20 falling about 16% and Life Strategy 100 falling about 6%.
• The correlation between bonds and shares is influenced by the type of news dominating the market, with growth news pushing them in opposite directions and inflation news pushing them in the same direction.
• Since 2021, inflation has been the dominant news, causing bonds to add to losses on shares instead of offsetting them.
• Return stacking involves using a fund that provides more than a pound of exposure for every pound invested, with part of it held through futures contracts, and the freed-up money invested in something that doesn't move with the core portfolio.
• A back test of return stacking from 2000 to 2021 returned about 10% a year, compared to about 6.5% for the 60/40 portfolio.
• A UK version of return stacking was built using the Wisdom Tree index history, returning about 9% a year in sterling over 25 years, with the worst fall in October 2008 being about 26%.
• The stack includes commodities and gold, with commodities serving as an inflation hedge and gold as a crisis hedge, although gold's safe-haven function is limited to about 15 trading days.

What to Watch Next

The video suggests monitoring the performance of return stacking over a longer period, including its ability to withstand stress, before considering it as a replacement for the traditional 60/40 portfolio.