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Surviving Market Chaos: Why Your 60/40 Portfolio Needs a Makeover

Surviving Market Chaos: Why Your 60/40 Portfolio Needs a Makeover

  • In an uncertain world, what steps can we take to safeguard our investments against geopolitical and economic upheavals?
  • Bob Elliot, the former right-hand man to Bridgewater’s Ray Dalio, argues that the traditional 60/40 portfolio might be a risky bet on global peace and that diversifying is crucial.
  • Learn why low-cost, machine-learning-driven ETFs can provide everyday investors access to sophisticated, alternative investment strategies.

Ready to turn your portfolio into a survival kit for the apocalypse? Your 60/40 strategy might need a serious makeover to withstand whatever is to come.

“Most people holding the 60/40 portfolio have a huge bet on peace and globalization,” says Bob Elliott, the Co-Founder, CEO and CIO of Unlimited Funds. “It’s been the truth in the past, but it is not necessarily the norm in the future. And so a critical thing is to create a diversified portfolio that helps protect against less globalization and more global conflict.”

But Bob, whose company uses machine learning to create low-cost index replications of “2 and 20”-style alternative investments, says that such a portfolio strategy is “not an exercise in projecting that it might happen. It’s recognizing and having the humility to understand that you don’t know what’s going to happen.”

The  former right-hand man to Ray Dalio (the enigmatic maestro of Bridgewater) adds that it’s

“much more important to be prepared for a lot of different outcomes than for any one in particular.”

Bob joined Cem Karsan and I for a lively Global Macro episode of Top Traders Unplugged, covering everything from the growing importance of non-correlated returns and inflation protection to the need to consider demographics and monetary policy in determining the future inflationary environment.

Read on for highlights of our conversation about the value of humility in investment strategies, how to counter geopolitical chaos and why exchange-traded funds (ETFs) are a particularly democratic approach to investing.

Chaos theory

“Lately, the world is best characterized by one word: ‘chaos,’” Chinese President Xi Jinping said in 2021. “Time and momentum are on our side. That is where we show our conviction and resilience, as well as our determination and confidence.”

Cem says he “certainly would suggest that the world is moving into a much more chaotic state than what we’ve seen before — and this could last for a very, very long time.”

That’s why he wonders whether the majority of investors might need to reimagine their allocation strategies.

“This is not the environment that the 60/40 portfolio was created for,” Cem explains.

“The key thing when I hear that sort of perspective or speculation is to have humility about whether or not that is true,” Bob replies. “I think what causes macro investors to get out over their skis is when they start to project.”

By that, he means that many investors think they understand how macroeconomic systems and political systems work. But they’re “two very different things” that require different skill sets.

“One does not connect to a skill set in the other,” Bob adds. “So as an investor, it’s very important to understand what your edge is … and where that ends.”

The 60/40 question

Bob admits that geopolitics is not his edge. But from a macroeconomic perspective, “various geopolitical outcomes have various macroeconomic consequences,” he notes. “The question is, do you want to be prepared for a wide variety of those different consequences, given the uncertainty? Or do you want to be concentrated on a particular set of outcomes?”

Cem responds to that by noting that “the world did 60/40 and didn’t diversify away from that outcome for 40 years, and it worked out really well. So I do think getting it right, broadly, is very important. … Diversification matters. But at some point, you also have to kind of back up and look at the big picture and see where things are more likely to go and bet more heavily that way.”

Bob and Cem agree that alternative investments are a great way to do that.

Cem highlights the strengths of hedge funds in particular in a rising interest rate environment, including (potentially) higher yields and more efficient use of capital. 

Fannie, Freddie and the Fed

Bob says it’s important to differentiate between “flows” (short-term market movements) and long-term macroeconomic trends. He suggests that while long-term trends might play out over months or years, day-to-day market movements are driven by short-term flows.

He points out that the market operates smoothly with the Fed’s support, with processes like options (“puts”) decaying and needing to be bought back, and companies repurchasing their own stock. As long as the Fed doesn’t introduce instability and continues to support growth over inflation, he thinks the market will continue to be stable, particularly because it’s an election year.

“This populist period means more spending,” he says. “We’re seeing it in ways that you wouldn’t expect, but fiscal policy is alive and well.”

He mentions specific fiscal policies and regulatory changes that could boost the economy, including a potential $7 trillion in liquidity from Fannie Mae and Freddie Mac releasing second mortgages, as well as a proposed Federal Trade Commission rule to ban non-compete clauses, which could benefit labor.

ETF, phone home

If you listen to Top Traders Unplugged, you probably know that we’ve had some heated conversations about trend-following ETFs and their performance compared to traditional funds.

I have plenty of mixed feelings about funds that replicate hedge fund strategies, as they often don’t deliver the promised returns, and the industry no longer consistently charges the notorious “2 and 20” fee.

With experience at Bridgewater and his own fund, Bob notes that the most talented asset managers allocate a significant portion of their portfolios to alternative investments — about 50%, compared to the 30% we so often see. (Large institutional investors negotiate lower fees, often paying closer to 1% rather than the 2 and 20 fee structure, whereas smaller or retail investors typically face higher fees.)

Bob saw how those institutional investors create low-cost index funds of alpha strategies, so he set about replicating this approach for everyday investors, allowing them to build portfolios similar to those of large institutions. The goal is to offer these sophisticated investment strategies at a lower cost through ETFs, making them accessible to all investors, not just the wealthiest elites (or the biggest groups). The democratization of investment opportunities is a net positive for everyone.

“The biggest institutional investors in the world create low-cost index funds of alternative investments,” Bob says.

Investing democratized for everyday investors

At Unlimited, he aims to do that for the everyday investor, “so they can start to build portfolios that are much closer to what institutional asset allocators do, rather than the options they have available [now],” he adds.

“I continue to find that to be much more interesting and compelling. Anyone [who] has proprietary views … can hang their shingle, charge 2 and 20, run a nice little business. But that doesn’t meaningfully influence and evolve the way in which the everyday investor is able to invest their money and build wealth over time.”

In the ETF space, “you can invest $20 or you can invest $20 million,” Bob explains. “The access is the same. That is a huge deal when we think about how can we get everyone to build better long-term savings portfolios — not just the very wealthy or the institutional.”


This is based on an episode of Top Traders Unplugged, a bi-weekly podcast with the most interesting and experienced investors, economists, traders and thought leaders in the world. Sign up to our Newsletter or Subscribe on your preferred podcast platform so that you don’t miss out on future episodes.