Oct 7, 2026 · 26 min
Rising rates expose cracks in stock-bond diversification
Why the traditional 60/40 portfolio might be dead
When inflation, debt and geopolitical risk push stocks and bonds lower together, investors nearing retirement may need more deliberate diversification.
- 1Rising rates and inflation can undermine 60/40 portfolios when stocks and bonds decline together.
- 2Managed futures, flexible bonds and defensive equities offer alternatives, but real estate and private equity may not diversify reliably.
- 3The guests favor high-quality, lower-volatility companies with limited leverage, strong cash flow and rising dividends.
Don't miss
David Miller and Chad Morganlander explain why quality, cash flow and lower leverage matter more when stocks and bonds lose their diversification cushion.
The brief
Kenny Polcaro asks David Miller and Chad Morganlander whether rising rates have broken the traditional 60/40 portfolio, especially for investors nearing retirement.
The guests argue that alternatives are not automatically protective: real estate and private equity can move with public markets, while managed futures may offer a different source of diversification.
Government debt, deficits, inflation and geopolitical risk help explain the rise in bond yields, raising questions about whether policymakers can control the long end of the curve.
The panel challenges passive S&P 500 exposure as technology concentration and higher discount rates reshape valuations, while small caps and defensive sectors compete for attention.
Their constructive outlook centers on quality companies with limited leverage, strong free cash flow and rising dividends, including selected payment networks such as Visa and Mastercard.
What was said on this episode
58 statements · 32 positive · 22 negative · 4 mixed
The 60/40 portfolio works mainly when interest rates are falling.
“I think 60-40 only makes sense when you think rates are coming down. When you think rates are going up, the whole formula doesn't work very well.”
Listen at 0:40
60/40 portfolios perform poorly when interest rates rise.
“When you think rates are going up, the whole formula doesn't work very well.”
Listen at 0:43
Asset correlations converge during broad market selloffs.
“the correlations go to one”
Listen at 1:01
The 60/40 portfolio is a simple, transparent investment approach.
“I really favor the 60-40. I think it's a simple, transparent way to go.”
Listen at 1:18
A 60/40 portfolio suits near-retirement investors needing an inflation hedge.
“But it is for someone that is near retirement that you need an inflation hedge.”
Listen at 1:41
Retail portfolio optimization adds complexity and can harm investors.
“when you start trying to optimize, that's when more complexity comes in and that's when you start to really hurt yourself.”
Listen at 3:11
Retail investors should consider buying individual bonds.
“Our approach is that you should consider just buying the individual bond.”
Listen at 3:24
Retail investors should consider buying individual bonds.
“you should consider just buying the individual bond.”
Listen at 3:25
Real estate and private equity may not perform well when equities decline.
“real estate or private equity are alternatives, but they're not alternatives in the sense that they'll do well when equities are doing poorly.”
Listen at 3:58
Real estate and private equity may not perform well when equities decline.
“they're not alternatives in the sense that they'll do well when equities are doing poorly.”
Listen at 4:01
Managed futures perform best when asset correlations rise toward one.
“But for managed futures CTA strategies, they do their best when... correlations go to one”
Listen at 4:17
Managed futures CTA strategies perform best when asset correlations rise.
“for managed futures CTA strategies, they do their best when... correlations go to one”
Listen at 4:17
Trend-following strategies perform well in severe market-dislocation years.
“a year like a 2008, a 2001-02, a 2022, this year are all great for trend following strategies.”
Listen at 4:26
Retail investors can buy or sell the Catalyst Milburn Hedge Strategy Fund.
“People can buy it or sell it.”
Listen at 4:53
Futures strategies are harder to operate as ETFs than mutual funds.
“It's more difficult to actually make a market for an ETF with future strategies, whereas it works very well as a mutual fund.”
Listen at 4:59
The Catalyst Milburn fund has never posted a double-digit negative calendar year.
“This has never had a double-digit negative calendar year because managed futures tend to perform during those bear markets.”
Listen at 6:24
The managed-futures fund has never posted a double-digit negative calendar year.
“This has never had a double-digit negative calendar year”
Listen at 6:24
Investors should combine offensive and defensive strategies for different market environments.
“I want my offensive strategies that will make good money if we have a bull market. And I also want my defensive strategies that'll make good money if there's a bear market.”
Listen at 7:33
Persistent deficits increase debt and push interest rates higher unless growth outpaces inflation.
“If you don't cut that deficit, that debt is just going to keep spiraling up and that has to push rates higher unless GDP growth is faster than the inflation.”
Listen at 8:56
Persistent deficits will push interest rates higher unless growth outpaces inflation.
“that debt is just going to keep spiraling up and that has to push rates higher unless GDP growth is faster than the inflation.”
Listen at 8:57
Two-year yields indicate that interest rates will rise.
“Look at the two years telling you that rates are going to go higher. So I think that perhaps that's what you should follow.”
Listen at 10:06
The Federal Reserve needs to raise interest rates.
“I think they need to hike.”
Listen at 11:44
The Federal Reserve probably will not raise rates by 50 basis points.
“I don't think they'll probably do 50 basis points”
Listen at 11:45
The Federal Reserve probably will not raise rates 50 basis points at once.
“I don't think they'll probably do 50 basis points, but they clearly need to position for what the markets are reflecting.”
Listen at 11:45
Inflation does not need to return to its previous peak.
“I don't think it has to get where it was then.”
Listen at 12:01
The U.S. is more likely to resolve its debt through growth or inflation than austerity.
“I think we're probably either going to grow our way out of it or we're going to inflate our way out of it. I don't see the austerity path being likely politically.”
Listen at 12:50
A 5.25% yield can produce negative real results after taxes and inflation.
“You're actually in the hole when you account for everything.”
Listen at 15:29
Moving heavily into fixed 5% yields is a dangerous investment decision.
“So I think a lot of people look at that and they will do that. But I think it's a dangerous move.”
Listen at 16:58
Moving heavily into fixed 5% yields is dangerous for investors.
“But I think it's a dangerous move.”
Listen at 17:00
Moving money into 5% yields can be dangerous for investors.
“I think it's a dangerous move.”
Listen at 17:00
S&P 500 margins are elevated, making its P/E multiple appear artificially low.
“We're at peak margins in the S&P 500 because the capital spending cycle is taking off. Margins are taking off, meaning the PE multiple is artificially low.”
Listen at 17:21
S&P 500 investors are insufficiently diversified because technology comprises about 48%.
“48% of the S&P is technology, basically. So they're not really diversified.”
Listen at 18:19
High momentum and high beta drove returns across major equity indexes.
“The contribution of return for all three of those indexes has been high mo, high beta.”
Listen at 19:14
Small- and mid-cap stocks are unattractive in the current environment.
“I'm not that bullish on the SMIDS in this environment.”
Listen at 19:40
Small- and mid-cap earnings may offset likely rate hikes, keeping equities healthy.
“I think they will have enough earnings to offset the rate hikes that we're likely to have. So I think equities can still be healthy.”
Listen at 19:43
Equities can remain healthy despite likely rate hikes.
“I think equities can still be healthy.”
Listen at 19:50
The Federal Reserve will likely deliver two rate hikes this year.
“I think that's more likely than not the case. Yeah.”
Listen at 20:02
Two additional interest-rate hikes are more likely than not.
“I think that's more likely than not the case.”
Listen at 20:02
Investors should consider lower-volatility equities after their prolonged underperformance.
“you should look now on the equity side at more of the lower volatility. seems of a market because they've underperformed for three years.”
Listen at 20:25
Investors should favor beaten-down companies that continue growing.
“So the place I'd prefer to go is the things that are really beaten up but are still growing.”
Listen at 20:50
Salesforce, Monday, and Wix are attractive despite having mid-teens earnings growth.
“So I like the things like a Salesforce. I like a Monday. I like a Wix. I like these companies that have mid-teens earnings growth.”
Listen at 20:55
Salesforce, Monday, and Wix are attractive despite technology-sector pressure.
“I like the things like a Salesforce. I like a Monday. I like a Wix. I like these companies that have mid-teens earnings growth.”
Listen at 20:56
Salesforce, Monday, and Wix are attractive because of mid-teens earnings growth.
“I like these companies that have mid-teens earnings growth.”
Listen at 21:00
NVIDIA looks attractive given 60% growth, 18x forward earnings, and a three-year backlog.
“I like some of the stuff that's so big like an NVIDIA that, you know, 60% growth but 18 times forward earnings. And a three year backlog, I think that looks really attractive.”
Listen at 21:09
Nvidia offers attractive valuation with 60% growth and a three-year backlog.
“an NVIDIA that, you know, 60% growth but 18 times forward earnings. And a three year backlog, I think that looks really attractive.”
Listen at 21:10
NVIDIA looks attractive at 60% growth, 18-times forward earnings, and a three-year backlog.
“I think that looks really attractive.”
Listen at 21:17
Technology will likely occupy a larger role in daily life within five to ten years.
“what are the odds that technology is not a bigger part of our lives five, 10 years from now than it is today? I think it's pretty low.”
Listen at 21:25
Diversified portfolios emphasizing healthcare, staples, and non-AI industrials underperformed.
“Any portfolio manager that actually had a diversified portfolio of healthcare, consumer staple, non-AI related industrials underperformed.”
Listen at 21:50
Consumer staples, healthcare, and non-AI industrials are preferred sectors.
“So for us, it's consumer staples. healthcare, as well as non-AI industrials.”
Listen at 22:26
Biotech investing requires specialized knowledge and careful selection.
“I think biotech, you really have to know what you're doing and you have to pick your spots very carefully.”
Listen at 23:02
Owning large pharmaceutical companies such as Eli Lilly may position investors well.
“Or you can just say, hey, I'm going to own some big pharma like an Eli Lilly and I think you'll be in a very good spot.”
Listen at 23:07
Owning large pharmaceutical companies such as Eli Lilly may position investors well.
“you can just say, hey, I'm going to own some big pharma like an Eli Lilly and I think you'll be in a very good spot.”
Listen at 23:07
Congress should establish bipartisan spending controls and reject two trillion dollars of deficit spending.
“What we need is a bipartisan doge where we're saying, no, two trillion of deficit spending is not acceptable.”
Listen at 24:09
High-quality, low-volatility companies will perform well over the next 36 months.
“High quality companies. I think are going to do really well over the next 36 months that have lower volatility, that are steady eddies.”
Listen at 24:39
Companies with low leverage, rising dividends, and growing free cash flow are attractive investments.
“Look at the companies that don't have a lot of leverage, that are increasing their dividends, that have a gigantic amount of growing free cash flow”
Listen at 24:48
Mastercard and Visa benefit from inflation through higher margins and revenue.
“if you look at like a MasterCard, a Visa, where they benefit from inflation, their margins go higher, their revenue goes up with inflation.”
Listen at 25:08
Visa and Mastercard benefit from inflation through higher margins and revenue.
“where they benefit from inflation, their margins go higher, their revenue goes up with inflation.”
Listen at 25:10
Visa and Mastercard benefit from inflation through higher margins and revenue.
“they benefit from inflation, their margins go higher, their revenue goes up with inflation.”
Listen at 25:10
Statements are attributed to the speaker as said on the episode and reflect their view at the time, not PodLume's. They are not advice.