The traditional 60/40 investment portfolio, which has long been a staple strategy for many investors, is facing increasing scrutiny and a shift in composition due to recent movements in financial markets. Instead of the conventional allocation of 60% in stocks and 40% in bonds, a growing number of strategists and investors are advocating for a revised structure: 60% in stocks, 20% in bonds, and 20% in alternative investments such as precious metals and cryptocurrencies.
The rationale behind this shift stems from observations that stocks and bonds have been moving in tandem too frequently, eroding the protective buffer that bonds historically provided against stock market volatility. Factors such as rising inflation, geopolitical risks, and escalating government spending have further diminished bonds’ effectiveness as a safe haven for investors. Todd Rosenbluth, head of research at VettaFi, noted a notable increase in the adoption of non-equity and non-fixed income products, emphasizing the need for diversification.
In this revised portfolio framework, gold is emerging as a central asset rather than a mere supplementary hedge. Recently, gold prices surged to a record high exceeding $4,300, marking over a 60% increase since the start of the year. This dramatic rise is attributed to heightened demand from central banks, a drive towards de-dollarization, and ongoing geopolitical tensions that have ignited what some experts refer to as the “debasement trade.” Steve Schoffstall, director of ETF product management at Sprott, highlighted a shifting perception of gold, which has been traditionally viewed as a marginal allocation tool but is now gaining recognition from prominent economists as a cornerstone of investment strategy.
Schoffstall suggests that most investors would benefit from maintaining a physical gold allocation between 5% and 15%. Reflecting this positive momentum, gold exchange-traded funds (ETFs), such as SPDR Gold Shares (GLD) and iShares Gold Trust (IAU), have experienced remarkable performance, both month-to-date and over the year. Notably, the World Gold Council reported that gold ETFs saw record monthly inflows of nearly $11 billion in September, with SPDR Gold Shares alone attracting over $4 billion. Current estimates suggest that total assets moved into gold funds this year have exceeded $38 billion.
Alongside gold, cryptocurrencies, particularly Bitcoin, are also becoming focal points of investment strategies. Some advisors recommend a 20% allocation to cryptocurrencies, with some pushing this up to 40% as viable for risk-tolerant investors. Bitcoin recently reached a peak of $126,000, with rapid inflows into investment vehicles like the iShares Bitcoin Trust ETF (IBIT), which saw close to $1 billion in one day alone.
The alternatives segment of the portfolio is not a single asset, but rather a mix of commodities, cryptocurrencies, and private credit. Yet, investors are advised to recognize the varying risk profiles: gold is often viewed as a safer, “risk-off” asset, whereas cryptocurrencies are considered “risk-on” investments.
Silver is also gaining traction as an investment option due to its diverse industrial applications, noted to have around 10,000 different uses. Recently, silver prices climbed to a record high of $53.59 per ounce, leading some analysts to project further increases.
Amid the burgeoning popularity of precious metals and cryptocurrencies, Rosenbluth cautions against the temptation to chase short-term gains. He emphasizes that while these alternative investments can enhance overall portfolio returns, they should not be viewed solely as vehicles for immediate financial gain. Instead, the primary objective of restructuring a portfolio is to incorporate assets that behave differently during varying market conditions, ultimately smoothing out performance over time.
This week exemplified the contrasting dynamics of these investments; while Bitcoin sharply declined by over 8% after its recent peak, gold and silver prices continued their upward trajectory. Simultaneously, the private credit market faces scrutiny, especially following the unexpected bankruptcy of auto parts company First Brands, raising concerns about potential bubbles in that sector.
