Stock markets are still setting record highs, despite the unstable geopolitical backdrop and economic uncertainty. Market euphoria has been boosted by SpaceX's initial public offering (IPO) last week, and by the potential IPOs of OpenAI and its rival Anthropic. However, market breadth is at record lows, with just a handful of AI-related names responsible for virtually all of the MSCI World's performance this year.
In the past, bumper IPOs have sometimes been the sign of a market top. In the current environment, some investors may want to take some profits, reduce exposure to stocks and remove the temptation to trade, while still remaining invested. One way to do this is by adding some bonds to your portfolio.
The traditional 60/40 portfolio (60% stocks and 40% bonds) fell out of favour between 2020 and 2024 after a series of unfortunate events. However, we are in a very different environment now, with yields on high-grade corporate and government debt sitting at some of the highest levels since 2007. This means that investors don't sacrifice so much return in buying bonds, unlike in 2020 and 2021.
A 60/40 or 80/20 asset allocation may look sensible again in a frothier stock market. A 60/40 US portfolio achieved a compounded annual growth rate of 7.3% over 200 years to 2024, according to Morgan Stanley. Stocks and bonds experienced negative returns in the same year on only 16 occasions, illustrating just how unusual 2022 was.