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Are 60-40 portfolios leading investors over a cliff?

The big increase in the U.S. M1 money supply could lead to inflationary pressures that will increase risks for the fixed-income portion of a 60-40 portfolio allocation.

April 8, 2021
By Jeff Benjamin

Traditional portfolio diversification, the bedrock of financial planning, is coming under assault from an unprecedented Federal Reserve monetary policy that is pouring trillions of dollars into circulation.

While some advisers cling to traditional models showing the long-term advantages of diversification across multiple asset classes, including stocks and bonds, the new money supply reality is raising concerns that fixed income might be riskier than ever, throwing a wrench into traditionally balanced portfolios of 60% stocks and 40% bonds.

“The 60-40 portfolio has been a great strategy over the years, depending on how far back you go, but the game-changer is that the M1 money supply just went from $6 trillion to $18 trillion in 12 months,” said Mike Willis, founder and lead portfolio manager of Index Funds.

“The Fed, by pumping trillions into the system, just made obsolete any investment strategy that holds bonds,” he added. “They just devalued the dollar in a way that a lot of Main Street investors and advisers are not aware of yet.”

To be fair, warnings that the sky is falling in the bond market have been a steady drumbeat in certain corners of financial services for decades. But there is no denying the math that the M1 money supply, which represents the total value of money available in the economy, has more than doubled over the past year.

Willis believes the early indicators of hyperinflation are already here and will only get worse as the government’s Consumer Price Index data catch up over the next 12 months, which is dire news for cash and bonds paying dollar-denominated income.