In Summary
The 60/40 portfolio has quietly stopped working. The risk-adjusted return investors could reasonably expect from the standard balanced portfolio has fallen to roughly a third of its long-run level, from a Sharpe ratio of 0.47 to just 0.14, as bonds and equities have stopped hedging each other for the first time in a generation. Since mid-2022, the two have moved together rather than apart, with the equity-bond correlation flipping to a positive +0.77, and no comparable episode in the past quarter-century has behaved this way for anywhere near this long.
The culprit is policy uncertainty, not only inflation. The reassuring story that 2022 was a one-off inflation shock and that everything returns to normal once prices settle does not survive contact with the data. Inflation still matters, but it is no longer the master variable. Tariff policy, geopolitical fragmentation and the slow erosion of central bank credibility are now doing the heavy lifting.
Gold, private credit and infrastructure are the diversifiers doing the work now. Where government bonds have failed to catch equity drawdowns since 2022, three asset classes have quietly stepped into their place. Gold has delivered positive risk-adjusted returns in nearly every regime tested and is the closest thing to an all-weather hedge. Private credit is posting its strongest showing on record. Infrastructure has held up across both this cycle and calmer ones before it, a rare cross-regime performer.
A regime-robust 'No-Regret' portfolio, built to work across cycles rather than optimized for the current one, roughly doubles the risk-adjusted return of a standard global benchmark. It delivers a Sharpe ratio of 1.33 against the benchmark's 0.59, compounds an initial dollar to roughly 9x its starting value over two decades against just 5x for the benchmark and cuts the deepest drawdown in the sample from −24.6% to −15.3%. The composition marks a substantial departure from tradition: government bonds are cut from roughly 20% of the benchmark to under 4% and public equities from 43% to 13%, funding materially larger allocations to gold (16%), private credit (29%) and private equity (16%), with a smaller residual position in infrastructure.
The historical hedge will return only once policy uncertainty resolves and inflation is fully re-anchored, and rate cuts alone will not do it. Only two of the five preconditions for a durable return to negative equity-bond correlation are true binding constraints, and neither is something a central bank can deliver on its own. Genuine resolution likely requires a durable Iran settlement and a more stable US trade regime, and both look like multiyear propositions rather than near term fixes. The remaining conditions, on monetary and liquidity settings, equity valuations and the yield curve, follow mechanically once the first two are in place.