Austin Stuhr, OLP Financial Advisor with Cornerstone Investments
Start with the basics: what is a 60/40 portfolio?
For decades, the most common recipe for a balanced investment account has been simple: put 60% of your money in stocks and 40% in bonds. That is the 60/40 portfolio.
The two pieces have different jobs. Stocks are the growth engine. They carry more risk, but over long stretches they have done the heavy lifting on returns. Bonds are the shock absorber. When you buy a bond, you are essentially lending money in exchange for regular interest payments, which makes bonds steadier and more predictable than stocks.
The whole idea rests on one assumption: that stocks and bonds do not usually fall at the same time. Historically, when the stock market dropped, investors moved money into safer bonds, pushing bond prices up. The 40 cushioned the 60. For roughly the twenty years leading up to 2020, that is exactly how it worked [1].
What changed
Starting around 2018, that relationship began to break down. By early 2022, stocks and bonds were moving together more than they had in about thirty years [1].
2022 is the year that made the problem obvious. Stocks fell. Bonds fell too. A standard 60/40 portfolio had its worst year since the 2008 financial crisis, finishing down just under 16% [2]. The shock absorber did not absorb anything.
The reason was inflation. Bonds do a decent job of protecting you when the economy slows down, but they are poorly equipped for rising prices. Inflation eats away at the fixed interest payments a bond promises, and it pushes stock prices down at the same time. When inflation is the problem, both halves of the portfolio get hit at once.
That is the gap alternative investments are meant to fill.
What “alternative” actually means
An alternative investment is simply anything outside the traditional stock-and-bond menu. Some are famously hard to get into and hard to get out of, such as private equity, private real estate, and private lending. Others are available in ordinary mutual funds you can buy and sell any business day. Trend following and long volatility are two additional examples.
The case for alternatives
- They respond to different things. Certain alternative strategies may help reduce overall portfolio volatility or drawdowns in some market environments, although there is no guarantee they will do so.
- A smoother ride. Certain alternative strategies may help reduce overall portfolio volatility or drawdowns in some market environments, although there is no guarantee they will do so.
- A wider opportunity set. Many alternatives can trade currencies, commodities, and interest rates, and can profit from prices falling as well as rising. A traditional portfolio can only do one of those things.
- Protection when timing matters most. A large loss early in retirement is the hardest kind to recover from, because you are withdrawing money at the same time the account is shrinking. Some investors consider alternative strategies as one tool that may help address sequence-of-returns risk, although these strategies involve their own risks and limitations.
- Better access than in the past. Certain alternative strategies that were once primarily available to institutional investors are now accessible through a broader range of investment vehicles, though costs, liquidity, and risks vary significantly
The case against
- Liquidity varies widely, and some are locked up. Private equity and private credit can tie up money for years. Interval funds sit in between: they let you buy in any time, but they only repurchase shares on a set schedule, often quarterly, and only a limited portion of the fund at once. If more investors want out than the fund will repurchase, your request is filled proportionally and the rest waits. Read the redemption terms before you invest, not after.
- They cost more. Fees are typically well above index funds, and some structures add a performance fee on top of the management fee. Flat-fee vehicles are generally the friendlier option.
- They will disappoint you at times. By design, alternatives do not track the stock market. When stocks are up 25%, these strategies almost certainly will not be, and holding them through those years is genuinely uncomfortable.
- They are harder to understand. Complexity is a real cost. If you cannot explain in a sentence what a fund does and when it is supposed to work, that is a reason to slow down.
- Tax treatment can be messier. Some structures generate more frequent taxable events or more complicated reporting than a simple index fund.
The bottom line
None of this means the 60/40 portfolio is broken. Some analysts think stocks and bonds will drift back toward their old relationship as inflation settles [8]. The narrower point is this: bonds protect against one kind of trouble, and 2022 was a different kind. Owning something that responds to that second kind, in a size you can live with and can stick with when it disappoints, is what real diversification costs.
Alternative investments may not be suitable for all investors and often involve unique risks that differ from traditional stock and bond investments. These risks may include limited liquidity, higher fees, leverage, valuation uncertainty, tax complexity, and a greater risk of loss. Investors should carefully consider investment objectives, risks, charges, and expenses before investing
References
[1] Burns, J. (2024, June 17). Where to go with positive stock/bond correlations. Advisor Perspectives. https://www.advisorperspectives.com/articles/2024/06/17/positive-stock-bond-correlations-joseph-burns
[2] Morningstar. (2023, October 25). Is the 60/40 portfolio a good investment now? https://www.morningstar.com/portfolios/is-6040-portfolio-good-investment-now
[3] AlphaWeek. (2023). 2022 CTA index performance review. https://www.alpha-week.com/2022-cta-index-performance-review
[8] BlackRock. (2025). Bonds starting to offer more diversification. https://www.blackrock.com/us/financial-professionals/insights/bonds-offer-more-diversification
[9] AQR Capital Management. (2024). A positive stock-bond correlation is a terrible reason to add more equity risk to your portfolio. https://www.aqr.com/Insights/Perspectives/A-Positive-Stock-Bond-Correlation-Is-a-Terrible-Reason-to-Add-More-Equity-Risk-to-Your-Portfolio
