Gavekal CEO Says 60/40 Investing Is Broken, Urges Bigger Gold and Energy Weightings

The traditional asset-allocation strategy of holding 60% stocks and 40% bonds no longer offers adequate downside protection, according to Louis-Vincent Gave, co-founder and chief executive officer of Gavekal Research. In an environment of rising long-term interest rates and expanding fiscal spending, he said investors should raise allocations to gold, commodities and energy assets instead of bonds.

In an interview on September 25, Gave said the old assumption that bonds rise when stocks fall, cushioning portfolio losses, no longer works as intended. Investors should consider a portfolio of 60% stocks, 20% commodities and 20% energy, he said.

Gave said rising government spending, accommodative monetary policy and heavy capital investment centered on artificial intelligence data centers are pushing long-term yields higher. As a result, bonds have also been weakening when risk assets come under pressure, eroding the diversification benefits of the traditional mix.

Among alternative defensive assets, he highlighted gold. Since Western countries froze the Russian central bank's foreign-exchange reserves in 2022, central banks around the world have started buying gold aggressively. That has created a new class of buyers that is not particularly sensitive to price. He also pointed to widening fiscal deficits and rising welfare costs tied to aging populations as long-term factors that could weigh on currency values and support demand for gold.

Gave also presented energy as a portfolio diversifier. As conflicts in Ukraine and the Middle East move toward an end, he said demand could emerge to rebuild crude inventories as well as ports, pipelines and refining facilities. He also expects capital spending to continue rising in power grids, shipbuilding and defense. The current investment cycle is not limited to AI, he said, and energy assets can also provide meaningful diversification.

In equity markets, Gave was positive on East Asia, including South Korea, China and Taiwan. For overseas investors, markets such as South Korea, Japan, China and Taiwan, where currencies are undervalued, look attractive, he said. If exchange rates normalize, investors could benefit from foreign-exchange gains. Even if undervaluation persists, the backdrop would still favor exporters.

In South Korea's stock market, he said bank stocks are worth watching alongside semiconductors. He cited the relatively resilient performance of domestic bank shares even as market volatility has increased. "Banks are like the heart of the economy," Gave said. "When bank stocks hold up while the broader market is under pressure, that is a meaningful signal."

Still, he said China's catch-up remains a variable for the long-term outlook for South Korea's semiconductor industry. Samsung Electronics Co., SK Hynix Inc. and Taiwan Semiconductor Manufacturing Co. currently enjoy strong profitability based on their technological edge, but the advance of Chinese companies into the market bears close watching. Citing a saying common in Hong Kong financial circles, he said there is a joke that once China enters a market, the word "profit" disappears from it, underscoring the risk that expanding supply could erode margins.