For decades, the 60/40 portfolio – a mix of 60 per cent stocks and 40 per cent bonds – was the trusted blueprint for balanced investing.

The strategy around it was simple and effective: if stocks dipped, bonds often rose, providing a handy safety net against volatility. As we see in today’s changing financial landscape, stocks and bonds often move together, rather than in opposition, leaving the traditional 60/40 portfolio less reliable as a diversification tool.

The key to this shift is inflation. Rising inflation forces central banks to keep interest rates elevated to manage price pressures. This dual pressure hits bonds and stocks simultaneously.

For bonds, higher interest rates mean falling prices since new bonds offer higher yields, making existing ones less attractive. Stocks also suffer as elevated borrowing costs and subdued valuations weigh on corporate earnings. In essence, inflation has become the common enemy nudging both asset classes in the same direction.

Government debt and deficits compound the situation. Massive borrowing increases yields as investors demand more return to compensate for rising fiscal risk. At the same time, concerns about future growth, potential higher taxes and political pressures weigh on equities. So, the burden of debt pushes yields up while simultaneously casting a shadow over stock market prospects.

Moreover, bonds no longer serve as the reliable safe haven they once did.