For years, the 60/40 portfolio—60% stocks and 40% bonds—has been the cornerstone of balanced investing. But as market conditions shift, investment advisors are increasingly faced with a pressing decision: Should bonds still represent the 40%, or is gold a smarter alternative?
Bonds: The traditional Option
Traditionally, bonds have been valued for their stability, income generation, and role as a buffer against stock market volatility. Over the past 25 years, a typical 60/40 portfolio, with stocks represented by the S&P 500 and bonds by the Bloomberg U.S. Aggregate Bond Index, has delivered a compound annual growth rate (CAGR) of 8.2%.
But rising interest rates and inflation have challenged this strategy. In 2022, both stocks and bonds suffered significant declines, sparking a broader discussion about diversifying beyond bonds. As a result, gold has emerged as a potential alternative.
Gold: A Reliable Hedge in Crisis
Gold is often seen as a safe haven during periods of economic uncertainty and inflationary spikes. While it doesn’t provide income like bonds, it has historically performed well in crises. When compared using gold spot prices (via the LBMA Gold Price Index), a 60/40 stock-gold portfolio produced a slightly lower 7.3% CAGR over 25 years. However, its value shines during market stress.
Examining Market Downturns
The Early 2000s Recession (2000-2002)
60/40 Stock-Bond Portfolio: +1.6% return. Bonds offered some stability as stocks faltered.
60/40 Stock-Gold Portfolio: +4.9% return. Gold excelled, offering superior protection during the tech bubble.
The Great Financial Crisis (2008)
60/40 Stock-Bond Portfolio: -20.1%. Bonds helped, but couldn’t fully offset the deep losses in stocks.
60/40 Stock-Gold Portfolio: -13.0%. Gold’s performance mitigated losses more effectively.
2022 Inflation Surge
60/40 Stock-Bond Portfolio: -16.9%. Both stocks and bonds struggled under inflationary pressure and rising interest rates.
60/40 Stock-Gold Portfolio: -8.6%. Gold served as a stronger hedge, limiting portfolio losses.
A Balanced Approach: The 60/20/20 Portfolio
To balance bond stability with gold’s inflation-hedging qualities, a 60/20/20 portfolio (60% stocks, 20% bonds, 20% gold) could strike an ideal balance. Over 25 years, this mix generated a 7.8% CAGR, offering better downside protection while maintaining substantial upside potential.
Risk vs. Reward
60/40 Stock-Bond Portfolio: 9% standard deviation, capturing 60-70% of market downturn losses.
60/40 Stock-Gold Portfolio: Higher volatility (11% standard deviation), but only captured 40-50% of downside, making it more effective in times of crisis.
60/20/20 Stock-Bond-Gold Portfolio: Balanced at 10% standard deviation, capturing 50-60% of downside, offering a middle ground between risk and reward.
Advisors Must Challenge Industry Norms
At iQUANT, we’re not pushing a one-size-fits-all portfolio. Instead, we encourage advisors to question long-standing practices and explore alternative allocations. Tools like the iQUANT Portfolio Optimizer empower advisors to make fact-based decisions, customized to meet each client’s unique goals.
The debate over whether to keep bonds, switch to gold, or mix both in a portfolio comes down to client profiles and your expertise. But with the right tools, advisors can create more resilient portfolios for the evolving economic reality.