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Here’s the deal with balanced portfolios of 60 per cent stocks and 40 per cent bonds: you make less in good times, but lose less when markets fall.

Sounds like a fair deal right now, correct? The risk of recession, sticky inflation and global political instability have added a lot of uncertainty to the investing outlook. There’s only one problem with 60-40 portfolios – they lost a lot of credibility last year as a result of surprisingly bad losses.

A new report from CIBC Capital Markets suggests it’s time to reconsider the 60-40 mix because it’s right for the times.

“Against a backdrop of wars in Eastern Europe and in the Middle East, and resilient inflation, we believe this is a very good environment for 60-40 portfolios,” the report says. “Either we will avoid a meaningful slowdown which should allow equities to deliver positive returns. Or alternatively, we could see a significant negative impact from rising interest rates which would slow the economy – in which case bond prices would rally and partially offset lower equities.”

The awfulness of the 60-40 portfolios last year was totally bond-related. With interest rates soaring as a result of inflation, the price of bonds and bond funds fell hard. Asset allocation exchange-traded funds with a 60-40 mix fell about 11 per cent, which is roughly two times as much as the S&P/TSX composite index.

“As 2022 showed, 60-40 portfolios do not immunize an investor from all economic and market conditions,” the CIBC report says. “However, a blended portfolio does typically moderate much of the volatility that one sees in an equity-only portfolio.”

For the first nine months of this year, 60-40 asset allocation ETFs were up about 3 to 4 per cent. That’s diversification in action. Bonds are down again this year, but only mildly. Meantime, Canadian stocks are up incrementally and U.S. stocks are strong.

Want to tweak a 60-40 portfolio to be even more resistant to market volatility? CIBC suggested skewing your bond holdings to short-term debt or adding cash. “As we have argued for some time, cash is paying excellent risk-adjusted returns currently.”

Two popular ways to hold cash these days are investment savings accounts packaged like mutual funds, or high interest savings account ETFs. Yields are in the 4.5 to 5.3 per cent range, which puts you ahead of the latest inflation rate of 3.8 per cent.

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