Is the 60/40 Portfolio Dead? Investing in the Age of Fiscal Dominance

In an era of fiscal dominance & sticky inflation, the 60/40 portfolio is being replaced.

Author

Junaid Ghauri
June 25, 2025

Introduction:

For decades, the 60/40 portfolio—60% equities, 40% bonds—was the gold standard of diversification.

It worked because of one key principle: when stocks fall, bonds rise.

But in 2022, that assumption collapsed:

  • US Stock Market Index: –19.4%

  • US Core Bond Index: –12.9%

  • Stock-bond correlation: jumped from –0.12 (20-year avg) to +0.51

The core logic behind the 60/40 portfolio is no longer reliable.

Diagram 1 – Stock/Bond Correlation (Albrecht)

Why 60/40 is Breaking Down?

Government bonds once provided safe, predictable, and consistent returns. But today, they’re doing the opposite.

What changed:

  • Persistent inflation

  • Supply-side shock

  • Central banks losing independence to fiscal authorities

Bonds are no longer a hedge. They’ve become a source of volatility.

The chart below shows how 60/40 portfolios historically perform best when inflation is falling, especially during periods of real growth acceleration—highlighting why today’s environment of high, persistent inflation leads to weaker returns and greater risk.

Table 1 – Median 60/40 Portfolio Returns by Macro Regime  (Kandhari)

Sticky Inflation:

Inflation isn’t just high—it’s sticky.

Why it's sticking:

  • Rising wages (labor shortages = permanent cost increases)

  • Geopolitical shocks (Russia-Ukraine war, U.S.-China tensions)

  • Supply-side strain (broken trade networks, commodity scarcity)

As Forbes states:

“Sticky inflation is less responsive to interest rates. That’s bad news for bondholders.”

The chart below shows how compensation increases (red line) have remained elevated relative to price increases (blue line), reinforcing that labor costs are a persistent driver of inflation—and not easily tamed by interest rate hikes.

Diagram 2 – Changes in Process and Labor Compensation (Dunkelberg)

Possibilities of Fiscal Dominance 

Fiscal dominance occurs when central banks lose control due to overwhelming government debt.

If central banks can’t raise rates without breaching debt limits, what happens?

  • Central banks keep rates low to avoid debt crises

  • Inflation persists

  • Bonds become even more useless

  • Stocks suffer due to rising operational costs

What This Means for Your Portfolio:

BlackRock puts it plainly:

“Elevated interest rate volatility and stock/bond correlation suggest seeking additional diversification from alternative investments.”

Instead of a pure 60/40 portfolio, investors should consider replacing some bond exposure with:

  • Crypto-native assets

  • Real assets

  • Derivatives-based rate products

Enter the New Diversification Stack:

Real Assets (gold, commodities, infrastructure)

  • Hedge against inflation and geopolitical instability

Crypto-Native Assets

  • Hedge against fiat debasement and policy uncertainty

Derivatives-Based Rate Products

  • Hedge against interest rate volatility and macro shocks

This shift is backed by correlation data:

  • Bitcoin–S&P 500 correlation: 0.15

  • Gold–S&P 500 correlation: –0.01

Together, these assets provide low or negative correlation to equities and create a multi-directional hedge that performs in volatile markets.

Table 2 – Bitcoin and Gold Performance vs. Traditional Stocks and Bonds (Barnette)

Strategic Reallocation:

A 2025 EY survey reveals: 59% of institutional investors now allocate over 5% to crypto.

Portfolio design guidance by risk tolerance:

  • Conservative: Focus on real assets + fixed income for inflation protection

  • Balanced: Add derivatives for asymmetric upside

  • Aggressive: High allocation to crypto and derivatives for higher risk-adjusted returns

Diagram 3 – Investment Reallocation Based on Risk Tolerance (Rosenberg) (Gaffney)

Takeaway:

The 60/40 model wasn’t built for:

  • Sticky inflation

  • Political volatility

  • Weaponized debt

Today’s markets demand a multi-asset framework: equities, fixed income, real assets, crypto-native assets, and derivatives-based hedges.

A portfolio must now be built not only for growth, but to withstand currency debasement, policy instability, and macro shock.

Final Thoughts:

The 60/40 portfolio isn’t dead—but it’s obsolete.

To navigate the next regime, investor strategies must evolve.
Incorporate modern alternatives, protect downside risk, and hedge against tail events.

Works Cited:

Albrecht, Bella. “'Diversification Is Back'—Why 60/40 Portfolios Are Working.” Morningstar, 8 November 2024, https://www.morningstar.com/markets/diversification-is-backwhy-6040-portfolios-are-working. Accessed 17 June 2025.

Barnette, Carolyn. “Diversifying with bitcoin, gold, and alternatives.” BlackRock, 24 March 2025, https://www.blackrock.com/us/financial-professionals/insights/portfolio-diversification-with-bitcoin-gold-and-alternatives. Accessed 17 June 2025.

Berns, David, and Larry Kim. “It's Time to Rethink the “40” in the 60/40 Portfolio.” Simplify Asset Management, 25 April 2024, https://www.simplify.us/etfs-use-case/its-time-rethink-40-6040-portfolio. Accessed 17 June 2025.

Caldara, Dario, et al. “The Effect of the War in Ukraine on Global Activity and Inflation.” Board of Governors of the Federal Reserve System, 27 5 2022, https://www.federalreserve.gov/econres/notes/feds-notes/the-effect-of-the-war-in-ukraine-on-global-activity-and-inflation-20220527.html. Accessed 17 6 2025.

Calomiris, Charles W. “Fiscal Dominance and the Return of Zero-Interest Bank Reserve Requirements.” Federal Reserve Bank of St. Louis, 2 June 2023, https://www.stlouisfed.org/publications/review/2023/06/02/fiscal-dominance-and-the-return-of-zero-interest-bank-reserve-requirements. Accessed 17 June 2025.

Coinbase, and EY Parthenon. “Increasing Allocations in a Maturing Market.” 2025 Institutional Investor Digital Assets Survey, EY Parthenon, 18 March 2025, https://www.ey.com/content/dam/ey-unified-site/ey-com/en-us/insights/financial-services/documents/ey-growing-enthusiasm-propels-digital-assets-into-the-mainstream.pdf. Accessed 17 June 2025.

Dolan, Ed. “Tariff Inflation.” Milken Institute review, 17 12 2024, https://www.milkenreview.org/articles/now-you-see-it-now-you-still-see-it. Accessed 17 6 2025.

Dunkelberg, William. “Sticky Wages, Stickier Inflation.” Forbes, 24 2 2023, https://www.forbes.com/sites/williamdunkelberg/2023/02/24/sticky-wages-stickier-inflation/. Accessed 17 6 2025.

Gaffney, Charles. “Smart and Simple Investing for 2025.” Morgan Stanley, 16 April 2025, https://www.morganstanley.com/im/en-us/capital-seeker/about-us/news-and-insights/articles/smart-and-simple-investing-for-2025.html. Accessed 17 June 2025.

Kandhari, Jitania. “BIG PICTURE - Return of the 60/40.” Morgan Stanley, 2024, https://www.morganstanley.com/im/publication/insights/articles/article_bigpicturereturnofthe6040_ltr.pdf. Accessed 17 June 2025.

Pelletier, Martin. “The bond market’s long slump: What it means for investors.” Yahoo Finance, Financial Post, 16 6 2025, https://ca.finance.yahoo.com/news/bond-market-long-slump-means-100022434.html. Accessed 16 6 2025.

Rosenberg, Jeffrey. “Rebuilding 60/40 portfolios with alternatives.” BlackRock, 13 March 2025, https://www.blackrock.com/us/individual/insights/60-40-portfolios-and-alternatives. Accessed 17 June 2025.

Shahid, Maisha, et al. “Current US Inflation Rate at 2.4%: Latest CPI Report – Forbes Advisor.” Forbes, 11 June 2025, https://www.forbes.com/advisor/investing/current-inflation-rate/. Accessed 17 June 2025.