BREAKINGVIEWS-Adding gold to your 60/40 portfolio is a 50/50 bet

By Jon Sindreu and Yawen Chen

LONDON, Jan 30 (Reuters Breakingviews) - If you don’t suffer from schadenfreude, you may be satisfied with your financial advisor's age-old prescription of keeping 60% of your money in stocks and 40% in bonds. Since 2025, splitting portfolios this way between the S&P 500 and U.S. Treasuries has returned 18%. But had you swapped your bonds for the precious metal, your return would have been above 50%. That, and the metal’s value as a hedge in volatile times now has it being touted as an alternative to fixed income part of a 60/40 portfolio. But beware, because free lunches have a tendency to disappear.

On Friday, gold dropped nearly 5% on news that Kevin Warsh will succeed Jerome Powell as Chair of the Federal Reserve, potentially keeping monetary policy tighter –but also more independent. It’s the first big wobble in a while for the precious metal, which on Thursday reached an all-time high of almost $5,600 an ounce, double the price from a year earlier. Gold has ridden the coattails of higher inflation, buying by central banks and Donald Trump putting the safety of Treasuries and the U.S. dollar into question.

It has done so well, in fact, that it has challenged the idea at the heart of the venerable 60/40 strategy, which is that investors face tradeoffs. Typically, larger returns come from more volatile assets, with the largest swings in price often happening in days those assets sell off. This is why it’s usually wise to park some money in allocations with lower returns but also lower volatility. None of this has applied to gold since 2025: while its volatility has surpassed that of the S&P 500, it has still returned an average of 0.28% during days in which the stock market was down. And, during good days, its average return has been almost as high, at 0.24%. As a result, a portfolio constructed with 60% stocks and 40% gold would have had a Calmar ratio, which measures returns adjusted for the maximum accumulated loss, more than 6 times higher than the conventional stocks and bonds mix during that same period.

That performance is why Morgan Stanley is pushing for at least a 20% allocation to gold at the expense of bonds. Given lingering geopolitical tensions and concerns over Federal Reserve independence, gold could easily pop higher.

The danger here is to confuse speculating on an asset with making space for a hedge. Gold has historically performed far less consistently than bonds. The period between the aftermath of the dot-com bubble and 2010 fits the bill, but bonds were by far the better haven in the 1980s and 1990s, and to a lesser extent from 2010 to 2019. The most similar period to today were the 1970s, when elevated inflation also led gold to do well on good and bad days. Today's 60/40 gold portfolio, however, has a Calmar ratio four times higher than back then. A recent surge in the Cboe Gold Volatility Index, which tracks gold-related options, points to a craze that is at risk of reversal.

The standard investment disclaimer is that past performance isn’t indicative of future returns. When recent performance looks flawless, then there’s extra reason to be cautious.

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CONTEXT NEWS

As of 0830 GMT on January 30, gold traded at $5,138.84 per ounce, a 4.7% fall from the previous day. Investors reacted to the possibility of a more hawkish Federal Reserve if former Fed Governor Kevin Warsh replaces Jerome Powell. U.S. President Donald Trump said on January 29 that he would pick his candidate the following day.

On January 29, the precious metal reached an all-time high of $5,594.82 an ounce.