For decades, the 60/40 portfolio – a mix of 60 per cent stocks and 40 per cent bonds – was the trusted blueprint for balanced investing.
The strategy around it was simple and effective: if stocks dipped, bonds often rose, providing a handy safety net against volatility. As we see in today’s changing financial landscape, stocks and bonds often move together, rather than in opposition, leaving the traditional 60/40 portfolio less reliable as a diversification tool.
The key to this shift is inflation. Rising inflation forces central banks to keep interest rates elevated to manage price pressures. This dual pressure hits bonds and stocks simultaneously.
For bonds, higher interest rates mean falling prices since new bonds offer higher yields, making existing ones less attractive. Stocks also suffer as elevated borrowing costs and subdued valuations weigh on corporate earnings. In essence, inflation has become the common enemy nudging both asset classes in the same direction.
Government debt and deficits compound the situation. Massive borrowing increases yields as investors demand more return to compensate for rising fiscal risk. At the same time, concerns about future growth, potential higher taxes and political pressures weigh on equities. So, the burden of debt pushes yields up while simultaneously casting a shadow over stock market prospects.
Moreover, bonds no longer serve as the reliable safe haven they once did. In the past, during periods of economic uncertainty or market turbulence, bonds would act as a stabiliser as investors sought their relative safety.
But in this day and age, bonds are also vulnerable to the same macroeconomic shocks, weakening their traditional role as portfolio shock absorbers. This is why we now see how the old 60/40 approach has lost much of its power to smooth out risk, prompting investors to rethink how they build resilience in volatile markets. The focus now is on “diversification 2.0” across different regions, sectors and risk drivers.
Equities remain the engine of growth but require greater selectivity. The US market, for example, has become more concentrated with a handful of tech giants driving most of the gains, increasing both concentration and valuation risks.
Meanwhile, opportunities in Europe and Asia are becoming more attractive. Europe’s lower valuations and historic fiscal pivot towards infrastructure, defence and energy independence suggest upside potential into 2026. Asia’s story is equally compelling, with Japan’s governance reforms and India’s growing digital economy, alongside selective exposure to China’s new economy sectors including green energy and electric vehicles.
Bonds have now become more of an income generator than an automatic hedge. The sweet spot is now in the mid-curve range, where bonds with maturities of three to seven years offer attractive yields with less price volatility than longer-dated debt, which is vulnerable to inflation surprises and government borrowing concerns.
Alongside bonds, gold has re-emerged as a crucial portfolio stabiliser. It thrives in environments of high debt and less reliable bond hedges, consistently providing protection during inflationary spikes or crises. Industrial metals such as silver and platinum, supported by demand from new technologies, add another layer of diversification.
Investors should also consider broadening into smaller companies. US small-cap stocks, especially quality profitable firms, could benefit from easing borrowing costs and resilient domestic demand. These provide exposure to different economic drivers than large-cap, tech-heavy indexes, but they carry higher risk, underscoring the need for disciplined selection.
Beyond asset classes, true diversification also means managing liquidity and embracing global breadth. With traditional safe havens compromised, cash and short-term instruments give investors flexibility to act opportunistically. International exposure across emerging and developed markets offers diversification benefits, as these regions often experience distinct economic cycles and policy environments.
We can’t predict every market move in this changing environment, so it’s important to prepare for uncertainty with a robust strategy.
The 60/40 portfolio, once a reliable guide, now requires reinvention, shifting the investor playbook. Investors need to embrace truly different diversification, rather than more of the same. It is an era in which portfolios should be designed to survive the storms that inevitably come.
Jacob Falkencrone is global head of investment strategy at Saxo Bank
