The traditional diversified portfolio – which holds 60% of its assets in stocks and 40% in bonds – may be due for a rethink as savers confront higher inflation, rising interest rates and equity volatility. Known as a balanced portfolio, the 60/40 mix is confronting a unique set of hurdles: Bond yields are rising , which means fixed income prices are falling. At the same time, the broad market's performance has been lackluster compared to the last two years, with the S & P 500 down 7.8% year to date. Further, the consumer price index in March jumped 8.5% , the fastest annual gain in more than 40 years. Rising inflation has spurred speculation that the Federal Reserve could take more aggressive measures as it raises interest rates. That means investors in the so-called balanced allocation could find themselves suffering declines in both the equities and fixed income sides of their portfolios. For instance, the iShares Core Growth Allocation ETF , which has a target fixed allocation of 60/40, is down about 8.2% year to date through Thursday's close. "If you have a 60/40 portfolio, 2022 is your worst year to date ever," said Jeffrey Gundlach, CEO of DoubleLine Capital in an interview with CNBC's Bob Pisani. The so-called bond king said that he had been advising against 60/40 portfolios for the past two years. "Basically, I think we're in a world where the risks of inflation and deflation are both real," Gundlach said. "Right now, we're experiencing the inflationary side, obviously." Even target-date funds that have reached their retirement date haven't been spared. "These tend to be between 40% and 50% in equities, but there's a lot of volatility in that portfolio, given what's going on with interest rates and in stocks," said Jason Kephart, director of multi-asset ratings at Morningstar. Here's how investors with a balanced allocation might be able to contend with declines on both sides of their portfolios. Searching for returns Instead of a 60/40 allocation, Gundlach has been recommending a portfolio that's more broadly diversified: 25% in commodities, 25% toward cash, 25% in stocks, and 25% long-term Treasury bonds. "You'd be far better off because commodities are actually up about 25% year to date, so that will more than compensate for your stock losses and your bond losses, and of course cash is just dry powder," said Gundlach, adding that long-term Treasury bonds would act as a deflationary hedge. Investors may also cast a wider net for returns, particularly if they have retirement income they can rely on. Guaranteed sources of income, such as Social Security and pensions, can give retirees enough stability to allow them to take a little more risk. "This might be dividend-paying stock funds or maybe a [real estate investment trust] to provide some additional diversification from 100% pure fixed income," said Dan Herron, CPA and founder of Elemental Wealth Advisors. He has found some of that exposure using an array of cheap exchange traded funds, in particular the Vanguard Real Estate ETF , the Vanguard High Dividend Yield ETF and the Vanguard Dividend Appreciation ETF . Naturally, there's a tradeoff. "You get rid of the inflation risk, but the portfolio becomes riskier," Herron said. Finally, the first quarter's turbulence has also created opportunities for investors to rebalance their portfolios and purchase bonds on the cheap, said Jamie Cox, managing partner at Harris Financial Group. He noted that 75/25 – not 60/40 – is the allocation he's been using for the last decade. "You have higher interest rates and as that occurs, it's time to rebuild positions in these things," he said. Cox highlighted high quality corporate bonds as "an area that's been absolutely smashed in the last couple of months." "There's a lot of value to be picked up there," he added. A gut check and a reassessment of risk As scary as it may be to watch a balanced allocation decline, investors shouldn't forget their longer-term goals – and they shouldn't lose sight of bonds' role within the portfolio. "A lot of the naysayers on 60/40 are overly focused on the fixed income side," said Morningstar's Kephart. "It's been a big drag this year, but when things get really bad for stocks, duration in bonds still tends to be your friend – it's a defensive component in there." Excessive portfolio tinkering could also lead investors to chase returns at their peril. "The conversation around changes to 60/40 leans toward adding more credit risk, high-yield bonds, core-plus bonds or adding alternative investments, which are more unpredictable," Kephart said. Investors rethinking their asset allocation amid this year's turbulence need to come back to one fundamental question, according to David Mendels, certified financial planner and director of planning at Creative Financial Concepts. "Why are you invested in the first place?" he asked. "If you're managing to a longer-term purpose, then does the volatility matter?" Mendels added. "It's more fun when the market goes up than when it goes down, but it does both."
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The traditional diversified portfolio – which holds 60% of its assets in stocks and 40% in bonds – may be due for a rethink as savers confront higher inflation, rising interest rates and equity volatility.