By Ian Salisbury

Investors frustrated by classic 60/40 portfolios' latest struggles may be able to get better results by expanding their holdings to include assets like alternatives and gold, although it pays to be aware of the trade-offs.

Balanced portfolios, which invest 60% in stocks and 40% in bonds, are supposed to help conservative investors grow their assets over time while smoothing some of the stock market's volatility. That is because bonds, a haven, tend to rally when investors flee the stock market.

Lately, things haven't worked out as planned. The S&P 500 is down 5.4% since President Donald Trump's April 2 tariff announcement jolted the stock market. To the surprise of many, bonds have fallen too: The Bloomberg US Aggregate index has declined 1.9%, raising questions about Treasury debt's status as the market's ultimate haven.

For 60/40 investors, the sight of stocks and bonds selling off in tandem brought back bad memories of 2022. Back then, spiking inflation forced the Fed to raise interest rates, sending bond prices southward, even as stocks also tumbled.

"The 60/40 portfolio has basically gone nowhere since the beginning of 2022, with only a 2% annual return for the past three and a half years," wrote Torsten Sløk, chief economist at Apollo Global Management, in a research note on Monday.

What can investors do? One solution, frequently touted by Wall Street, is to incorporate so-called alternative strategies, similar to ones pioneered by hedge funds and private-equity firms, but adapted into vehicles for Main Street investors.

One recent study by BlackRock found that incorporating two of its alternative funds, the Global Equity Market Neutral Fund and the Systemic Multi-Strategy Fund, into 60/40 portfolios improved returns and lowered volatility. "These alpha-seeking strategies have the potential to turn market beta headwinds into tailwinds," the asset manager argued.

Alpha refers to outperformance, while beta denotes volatility.

A factor to consider, though, is that alternative funds are often more expensive than exchange-traded funds that track the market. The Global Equity Market Neutral Fund has an annual fee of 1.35%, compared with 0.03% for BlackRock's flagship iShares Core S&P 500 ETF.

Fund researcher Morningstar recently looked at alternative funds across seven common categories, to see how they performed in the recent sell off. While one slate of funds, those in its equity market neutral category, outperformed bonds, most didn't.

Gold is another option for investors looking to reach beyond stocks and bonds. The metal has rallied 3.4% since April 2, and is up nearly 23% in 2025, seemingly confirming its role as a global haven. Many investors have been adding small slivers of gold and other commodities to stock-bond portfolios as a diversifier for years, especially since ETFs like SPDR Gold Shares make the option cheap and convenient.

But as with alternatives, there are drawbacks. While holding gold alongside other assets can smooth your returns, on its own, gold is extremely volatile. A bigger issue is that unlike stocks or bonds, gold doesn't generate any cash flows. In the long run, one shouldn't expect much in the way of returns, beyond keeping up with inflation.

One hundred dollars invested in gold in 1928 would be worth about $12,600 today, according to data compiled by New York University professor Aswath Damodaran. That compares to $983,000 for the S&P 500 and $50,000 for corporate bonds.

Frustrating as it may be, 60/40 investors shouldn't necessarily write off a third option -- simply sticking with what they are doing. Over the past 15 years, the Vanguard Balanced Index Fund has returned a respectable 8.4% a year on average.

While recent bond losses are painful, it is worth noting that bonds have still delivered positive returns year to date, with the Bloomberg US Aggregate index up about 1%. The yield is about 4.5%, so the income fixed-income assets generate should help cushion the pain from any additional declines in bond prices. That is an advantage investors didn't enjoy in 2022, the last time 60/40 funds really tried their patience.

Write to Ian Salisbury at ian.salisbury@barrons.com

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April 14, 2025 14:21 ET (18:21 GMT)

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