In a Trump world, how should investors spread their funds?

It was always going to be exciting.

President Trump clearly likes to shake everything up and see how things land. On the one hand, this innovative approach may lead to solutions that others missed. On the other, it increases the level of uncertainty, which is something that CEOs and investors don’t like.

Trade tensions are making the headlines, but the key (related) risk is the outlook for inflation. The probability of higher-for-longer inflation, while still low, has increased and this should be factored into how you invest.

There are three ways investors can deal with the uncertainty of the new administration.

When put this way, it is obvious which approach is likely best for your physical, emotional and financial health. But what does it mean in practice?

Since 2022, when inflation surged, causing equities and bonds to fall sharply, many have announced the death of the 60% equity, 40% bond portfolio.

Our 2024 theme of ‘Sailing with the Wind’ embraced this positive correlation between bonds and equities, saying that falling bond yields would support equities. This worked out really well for investors, with our balanced strategy generating returns of over 11%.

This year, we continue to see positive returns for both equities and bonds. However, there is a niggling concern that the positive correlation could come back to bite us should inflation surprise on the upside. Trump’s immigration and tariff policies are potentially inflationary.

While our central scenario is that this will not get in the way of stable or slightly lower inflation, the risks have clearly increased.

How should investors deal with this increased risk. I don’t believe throwing out the 60/40 portfolio altogether makes sense for an investor with a balanced risk profile. Rather, I suggest allocating around 45% to global equities and 30% to global bond markets and then supplement this portfolio with another 25% of investments in other asset classes.

Gold is the first port of call for us. We assign a 5% weight to the precious metal in our balanced portfolio. Gold is doing incredibly well, rising 30% over the past 12 months, and over 10% so far this year.

We are currently close to the top of a rising trend channel which suggests the risk of some consolidation or correction near-term. However, any dip towards $2,700-$2,750 would be a great area to top up allocations, in my opinion.

Thereafter, we look to other alternative asset classes. My next port of call would be private credit. We continue to see attractive expected returns for this asset class, regardless of the stage of the business cycle. It also has the benefit of giving investors exposures to floating rate debt.

While we believe the barrier to the Fed hiking interest rates in 2025 is quite high, if inflation were to pick up again, it could force the Fed’s hand. Floating rate debt would increase the yield on offer to investors in such a scenario.

While historically the focus here has been on the US, we are starting to see more opportunities in Europe as the private credit market there develops.

Hedge fund strategies also have the potential to diversify your exposure. There are several areas within this space that can help improve the risk-reward of a portfolio. Macro, systematic and trend-following strategies have among the best ability to deliver strong returns in an environment where a 60/40 portfolio performs poorly.

Portfolio managers in this area can take short positions in equity or bond indices as well as long positions in focused areas that are likely to benefit from higher inflation and interest rates. Other areas within the hedge fund strategy space include equity long-short, M&A arbitrage and relative value (credit) which can help improve the risk-return profile of a portfolio.

The final area to look at is private equity.

While a rising inflation and interest rate environment can be challenging for private equity, we think that the current set-up for private equity is quite positive. We expect the IPO market to open up in 2025, which means investors will be more likely to realise their returns in the coming 12-18 months.

Overall, while nobody wants a resurgence of inflation as it would clearly be challenging for investors, the above measures would likely help you better weather any such scenario, should it unfold.