CHISWICK, WEST LONDON – I’m thinking about building a 60:40 short portfolio.

That is, a portfolio that is 60% short stocks and 40% short bonds. (Taking a short position means we’re betting stocks and bonds will fall in price.)

The idea is, by combining a short position in stocks with a short position in bonds, this portfolio would profit from a decline in the stock market… but with more safety and less volatility than simply shorting stocks.

A 60:40 portfolio for bears, in other words…

More below.

Moving On Again

Greetings from London… 

My family and I are traveling family, which means we don’t have a home or any possessions, and we live permanently on the road. 

When we first started living like this, we liked to travel fast, never stopping for more than a day or two in any one place. We made a complete circumnavigation of the planet like this. 

But in the last year, we’ve slowed down. First, so we could do a full ski season in Wyoming and then, so we could say goodbye to my mother in London after she died. 

We’ve finished our work in London and, in four weeks, we are moving on again to New York and continuing our journey as a traveling family.

I’m not sure what pace we will use for this next leg of our journey. Our experience in London has changed us in some ways…

We have realized that our single greatest priority as a family is not just to have travel adventures, but to be around our friends and family, and especially our parents, and always be having fun. (Kate’s parents live in Florida and my father lives in New York.) 

That’s why, if you ever meet us, we’ll make you play games with us like charades or cards or sports. We will challenge you with riddles or we will sing and dance and play music together.

(For our next unit study – where we immerse ourselves in one learning activity for a few weeks or months – our idea is that we each learn to play a musical instrument. The idea being that we can start a party anywhere we go.)

Cricket in Chiswick

I’m so proud of the boys, Dusty (13) and Miles (11).

Four months ago, they’d never heard of cricket. But they took to it like naturals.

Now, they’re valued members of Chiswick Cricket Club and regular members of Chiswick‘s Sunday cricket team. 

The club had an award ceremony on Friday night. It officially inducted the boys into the adult cricket team by bestowing them with green cricket caps and medals.

Here they are…


Dusty and Miles become valued members of the Chiswick Cricket Club

One of the great things about Sunday cricket matches is the meal they serve you halfway through the game.

Both teams sit down at a long table together and eat sandwiches, cakes, cookies, and chicken wings, and drink tea together. Then the battle resumes for another few hours… 

We played a cricket match yesterday. Here we are having tea yesterday with the opposition from Maida Vale Cricket Club…


Sunday tea with the opposition

And here is Miles walking back to the pavilion after his innings. We lost the game but Miles batted until the end of the game and finished “Not Out” with four runs…


Miles batted until the end of the game

A 60:40 Portfolio for Bears

Back to the 60:40 portfolio for bears…

The traditional 60:40 portfolio was conceived for long-term, passive stock market investors. It’s a portfolio of 60% stocks and 40% bonds.

The theory is, holding 60% stocks and 40% bonds will generate almost as good a return as just holding 100% stocks, but with lower volatility.

Diversification is the secret behind this. In the table below, you can see how a portfolio of 100% performed vs. a traditional 60:40 portfolio… 

Performance Metric 100% Stocks (1926-2020) 60:40 (1926-2020)
Average Annual Return 10.3% 9.1%
Best Year (1933) 54.2% 36.7%
Worst Year (1931) –43.1% –26.6%
Years With a Loss 25 of 95 22 of 95

Source: Vanguard

Since 1982, the 60:40 portfolio has done even better. That’s because interest rates have fallen since 1982 and bonds have enjoyed an epic bull market. 

So if the traditional 60:40 portfolio has done so well, you may be wondering: Why am I thinking of shorting (or betting against) stocks and bonds?

Final Stages of the Everything Bubble

As regular readers know, I believe we’re in the final stages of the greatest speculative bubble of all time – in all things.

I am bearish on the stock market. And I want to bet against it. 

The thing is, this bubble is like a cockroach and it just won’t die. So I’m hesitant to short it outright.

Instead, I’m thinking of betting against the stock market using the 60:40 portfolio approach.

For the past 22 years, bonds have had a negative correlation to stocks. That means they’ve moved in opposite directions.

So if the stock market keeps rising, my losses on stocks will be partly offset by gains from the bonds.

But if the stock market falls (meaning I make money on my short stock position), either I’ll lose some of my returns from the bond position going against me…

Or I may get lucky, and bonds and stocks may become positively correlated. In that case, both bonds and stocks would fall together.

With inflation rising, I find this quite likely. Let me explain…

A Potential Win-Win

It’s an argument based not on historical analogs but simple probabilities.

As I mentioned, bonds and stocks have had a negative correlation for 22 years. (The correlation turned negative in 1997, according to a study from Ruffer, an investment management firm.)

So bonds up, stocks down. Or bonds down, stocks up. You can see this in the chart below…


Source: The Ruffer Review 2021

With the 60:40 bear portfolio, we don’t lose much if we lose. We don’t win much if we win. It’s mostly a wash. 

The only way this portfolio loses is if BOTH bonds and stocks rise from here. But that seems pretty unlikely.

Look at this chart of stock market valuations. It shows the average of four different valuation indicators. Valuations are at all-time highs…


Source: Advisor Perspectives

The only way the stock market gets an even higher valuation is if nominal interest rates go lower. But nominal interest rates can’t really go lower because government bond yields are already close to zero. 

Yet, if inflation builds up, it will simultaneously hurt stock market valuations and bond valuations… the bond/stock correlation will turn positive again… and our 60:40 portfolio could potentially win on both sides. 

Perfect Storm

As regular Postcards readers know, I’ve warned from the beginning that high inflation is not only possible, but probable for the first time since the ’70s.

The sweet inflation level for stock market valuations is about 2%, according to research from Ruffer. Higher inflation than that – which we have now – will start to put pressure on bond prices and stock prices simultaneously.

In sum, there has never been another time in history where bonds and stocks have carried such rich valuations, and are negatively correlated, and the inflation trend seems ready to run.

It seems like a perfect storm for the conventional 60:40 portfolio… but a perfect setup for my short 60:40 portfolio. 

In short, a bearish 60:40 portfolio approach seems like a pretty safe and clever way to short this “cockroach” of a bubble…

– Tom Dyson

P.S. Today is Penny’s ninth birthday.

We always make a big deal out of our birthdays in this family as they’re always nice excuses to throw parties, even if we’re traveling and we don’t have any friends around us.

Penny loves her birthday more than anyone I’ve ever known. Here she is about to cut her cake today…


Penny the birthday girl

Like what you’re reading? Send your thoughts to [email protected].


A longtime reader sings the praises of the Dyson family’s lifestyle…

Reader comment: I am an 88-year-old lady now but I have followed you in all of your travels. I have especially enjoyed your travels in the United States.

When I was a teacher, I worked with a group of girls from eight years old until they graduated from high school. We had a babysitting service in the summer and after school. By the time they graduated, they had enough money that we traveled all over Europe for a month. I had them study before we went to all the countries we would go to and their history. It was a wonderful trip and experience for them.

I live in Georgia. If you come through here on your way back to Florida, I have a nice place where you and your family can stay. I would love to have you. Give my love to your three great children. And I am especially proud that you and Kate are back together. They are getting a one-of-a-kind education. Much more than a regular school room. Keep up the good work. With much admiration to your entire family.

Another reader relates to Tom giving up his smartphone from last week’s Postcard, “One ‘Big Trade’ to Achieve Financial Freedom”…

Reader comment: I have never owned a smartphone as much as I thought that I should. Only having a mobile in the 1990s made me aware of how addictive it can be and distracting from everything else. You always have fascinating news and the savings are immense without a smartphone.

Also, the newsletter is most enjoyable, especially when you are in lockdown in Australia. 

And finally, one reader shares their experience with Tom’s special-opportunity advisory, Tom’s Portfolio, after a fellow reader questioned Tom’s approach last week

Reader comment: I had been following investment info on a variety of writers through Bill Bonner’s publications. I started reading your Postcards about a year and a half ago. Earlier this year, I actually signed up for your Portfolio because I thought it to be the best-reasoned information, and you had skin in your plan.

Before I did so, however, I went through whatever investments I had and decided to keep a variety of REITs that I had, and kept whatever gold and silver investments I had. The remaining portion of my assets were a little over 50% of my worth, so I split it into the approximate proportions that you suggested. The end average results – items purchased at various times – I have tracked.

Some of the tankers can fluctuate quite wildly so I needed to just let it go and look at the whole picture. Once you get this mindset, the rest is easy. Take a look every now and then. Don’t let individual fluctuations bother you. Keep with the program.

Tom’s note: As always, thanks for writing in! Please keep your messages coming to [email protected], and I’ll answer as many questions as I can in a future Friday mailbag edition.