The Art and Science of Return Stacking, Ep #83

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The enduring wisdom of financial planning often revolves around diversification(1). Yet, as highlighted in this episode of Upthinking Finance™, the ways we balance portfolios—and the very assumptions underpinning traditional advice—may be overdue for review. We’re focusing on the critical importance of risk management for investors, especially in the years leading up to retirement, and on how past market conditions may not reflect what lies ahead. My guest, Mike Philbrick, shares his thoughts on the shift from decades of falling interest rates and stable inflation to a more volatile environment marked by rising rates, inflation shocks, and evolving global dynamics. He believes that investors should move beyond traditional stock and bond portfolios by embracing greater diversification—including exposure to commodities (2), global assets, and alternative strategies like trend following and return stacking.

(1) There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.(2) The fast price swings in commodities will result in significant volatility in an investor’s holdings. Commodities include increased risks, such as political, economic, and currency instability, and may not be suitable for all investors.

The End of a 40-Year Tailwind

The last four decades have been a period largely defined by falling interest rates, disinflation, and economic globalization. These conditions created a supportive backdrop for the classic 60/40 stock-bond portfolio. When stocks faltered, bonds often thrived, offering consistent dampening of volatility. This yin-yang dynamic established a pattern of reliable returns and relatively muted drawdowns for balanced portfolios.

However, the recent shift—marked by rising interest rates, surges in inflation, and increasing geopolitical fragmentation—has upended this familiar regime. Not only have stocks and bonds begun to move more closely together, but bond investors have faced a five-year bear market. For anyone banking on the playbook from the last 30 or 40 years, the past few years have been a wake-up call.

Recognizing and Addressing Portfolio Blind Spots

One concept we discuss is the implicit risk of overreliance on market-capitalization-weighted indices such as the S&P 500. Historically, dominant sectors and companies shift dramatically within these indices. In 2008, Exxo