The 60/40 Rule for Stocks and Bonds Is Over. Here’s Where to Invest Right Now.

Listen to this post

Stocks are having a terrible year so far, as I’ve mentioned previously, but bonds are performing even worse.

There’s an old saying on Wall Street, perhaps dating back to the days of J.P. Morgan himself, that “gentlemen prefer bonds.” That may have been true in the recent past. But that preference has completely changed in today’s inflationary environment, and you need to stay in step with the times.

Traditionally, the rock-solid, all-weather portfolio allocation for “gentlemen” (and ladies too) has been the so-called 60/40 portfolio. It has been the bedrock of “prudent” investment management for decades — even long before I got into this business 35 years ago.

Simply stated, the 60/40 portfolio advises you to place 60% of your assets in stocks and 40% in bonds, so you could hit the golf course with an easy mind and sleep well at night. And according to Barron’s, that advice worked for decades, with a total return of about 9% per year on average and with far less volatility than an all-stock portfolio. But with inflation now surging to 40-year highs and the Federal Reserve dead set on raising interest rates — perhaps significantly — the 60/40 portfolio is quickly going the way of the dinosaur… the same as analysts who cut their teeth investing during the 1980s like me.


The theory was that stocks and bonds are typically non-correlated asset classes. That’s fancy Wall Street jargon for: When stocks zig, bonds zag. And that was mostly true for many decades.

But not anymore.


As you can see above, the traditional asset allocation of a 60/40 split between stocks and bonds is bleeding red ink so far this year… at both ends. And bonds, not stocks, are the worst offenders here. If you think stocks have been a bad place to be lately, bonds are far worse.

The 30-Year U.S. Treasury Bond Index is down, get this, 14.36% over the past 12 months. The S&P 500 Index, by contrast, is down only 4.47%. In other words, you would have lost three times more money in bonds than in stocks over the past year. The 60/40 portfolio is on track for a total return of -49% this year, based on inflation-adjusted annual returns according to Bank of America Global Research.

Let that sink in for a minute… This supposedly low-risk, sleep-well-at-night mix of stocks and bonds could cost you 50% of your wealth in 2022!

So much for bonds’ “safe haven” status.

The truth is, in a rising-interest-rate, inflationary climate like we have right now, bonds are neither “safe” nor a “haven” from volatile markets.

Bonds pay a fixed interest rate over many years. For the 30-Year T-bond mentioned above, you are locking in your money with Uncle Sam for the next three decades in return for an interest rate of just 3%!

Folks, yesterday’s Consumer Price Index report shows that inflation accelerated again last month at an 8.3% annual clip. So, after inflation, you are getting a return of minus-5.3% on that “safe” Treasury bond!

At that rate, you’ll most likely go broke within that 30-year time horizon.

The name of the game today is stocks, hard to believe though it may seem. But not just any stocks. You want cash-rich, quality, dividend-paying “forever stocks,” as TradeSmith CEO Keith Kaplan recently pointed out.


Corporate America is in great financial shape today. Even better than Uncle Sam, who has gone even deeper in debt in recent years. By contrast, S&P 500 companies have paid it off, with just $1 of debt for every $1 of profits today, compared to five bucks of debt for every dollar of profit 10 years ago.


Plus, corporations are flush with cash. They were sitting on a stash of $7.1 trillion in cash at the end of last year, as you can see above. What will they do with all that cash?

Most likely, they’ll buy back their stock, which boosts earnings per share, making their shares more attractively valued. More importantly, they’ll likely dip into all that excess cash flow to boost dividend payouts.

Analysts expect 13% dividend growth for S&P 500 companies this year, according to Bank of America Global Research. That is more than twice the expected growth rate of earnings per share of just 6% in 2022.

And there is ample precedent to expect this to happen. During the last period of high inflation in the 1970s, S&P 500 companies doubled their dividend payouts.

The bottom line is that if you want to protect yourself against inflation and higher interest rates, steer clear of most fixed-rate bonds. Instead, seek out inflation-protected dividend yields from America’s high-quality, cash-flow-rich, dividend-paying stocks.

That’s where my “safe” money is invested right now.