Morgan Stanley’s Chief Investment Officer, Mike Wilson, suggests changing the classic 60/40 portfolio to a 60/20/20 split. This new plan includes 20% in equities, 20% in bonds, and 20% in gold, aiming to offer better protection against inflation.

New Strategy to Manage Risks

Wilson believes this strategy addresses the limited growth potential of U.S. stocks compared to Treasuries. It also meets the need for higher long-term bond yields. He views gold as a strong protective asset that works well with high-quality stocks. The traditional 60/40 model depends on stocks and bonds balancing each other, but adding gold brings an extra layer of defense. Wilson favors shorter-term Treasuries, particularly five-year notes, as they provide better rolling returns. Wilson sees both gold and stocks as protective investments: stocks have growth potential, while gold serves as a safe option when real interest rates fall. This view is gaining traction as U.S. stocks bounce back; the S&P 500 and Nasdaq are hitting new highs, despite September often being a weaker month, partially due to Trump’s tariffs announced on April 2. With the S&P 500 and Nasdaq reaching new heights, we should consider strategies that reflect limited upside from here. One option is to use derivatives to sell out-of-the-money call options against our current holdings. This generates income while the market may trade sideways. This strategy is appealing, especially as the VIX, which indicates market volatility, has dropped to 13.5, a low not seen since the last quarter of 2023, making option premiums attractive for sellers.

Gold as a Strong Hedge

We should now view gold as a key hedge, particularly with ongoing inflation concerns. Historically, gold tends to move opposite to real interest rates; when real yields drop by 1%, gold often sees gains in the high single-digit percentages. Therefore, purchasing call options on major gold ETFs can offer leveraged exposure during times of market instability or falling real rates. Favoring shorter-term bonds means we should adjust our positions along the yield curve. One effective approach is using Treasury futures, particularly taking long positions in 5-year note futures rather than 10-year note futures. The gap between the 5-year and 10-year yield has recently narrowed to just 15 basis points, making a curve-steepening trade an attractive way to capture potential changes in rate expectations. This cautious approach is further supported by the calendar, as we are in a historical weak period for stocks. Since 1950, September has been the worst month for the S&P 500, with an average decline of about 1%. This seasonal factor gives us another reason to buy protective puts and strengthen our hedges in gold for the weeks ahead. Create your live VT Markets account and start trading now.

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