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The math isn’t adding up for the return of the 60/40 portfolio.
For decades, a rule of thumb advisors used to create a “traditional” portfolio for clients was an allocation of 60% to equities and 40% to bonds. The thinking was that this was the safest bet for investors, with the fixed income component providing some stability in the event that equity markets fall in value. Throw a bunch of index funds into the mix, advisors have argued, and the portfolio becomes even safer, since you are not picking individual stocks.
Any other assets get short shrift. Indeed, alternative investments, according to 60/40 proponents, are to be avoided at all costs, because of the so-called illiquidity risk.
So, how has that worked out over the past few years? Not well. During the past three and a half years, 60/40 portfolios have returned just 2% annually, according to Barron’s. Worse, in the two weeks following President Trump’s announcement of his tariffs plan, the subsequent market volatility led to both the S&P 500 and the Bloomberg Aggregate Bond Index — the latter being the key benchmark for fixed income — both losing value.
In theory, proponents of the 60/40 portfolio argue that stocks and bonds are supposed to be negatively correlated, providing a natural hedge for the portfolio. However, this has not always held true, especially in recent years. In 2022, both the S&P 500 Index and the Bloomberg U.S. Aggregate Bond Index fell in the same year for the first time in history.
Given the strong public market performance of 2023 and 2024, some market strategists have posited that 2022 was nothing more than a fluke. However, the jury is still out on that, and investors need to take note. For one thing, rather than being risky, alternative assets were a safe haven in the bloodbath of 2022, reporting a positive return, while the vast majority of other asset classes were in the red. The illiquidity of these opportunities provided the kind of wealth protection that 60/40 portfolios just couldn’t deliver.
Of course, alternative investments like private equity, private credit, venture capital, and real estate have down cycles as well. That’s the nature of markets. However, alternatives often weather challenging market conditions better than their more liquid counterparts, as they are typically valued based on fundamentals, rather than investor sentiment.
Here’s another benefit: the ability to capitalize on the future. For all the attention around stocks, they have been a withering asset class. In 1996, there were 7,300 publicly traded companies in the U.S. Today there are about 4,300. That has led to fewer opportunities to invest in innovation. Take artificial intelligence, for instance. Yes, you can invest in public AI names like Nvidia, but so can everyone else. That’s why Nvidia and the six other Magnificent 7 components generally represent 30% of the value of the S&P 500.
Yet as C.S. Lewis said, “There are far better things ahead than the ones we leave behind.” While existing equities may be benefiting from where we are today in AI, to truly capitalize on the potential of AI and innovation more broadly, accredited investors can invest in growth-oriented venture capital funds that are putting money behind early-stage innovators. Or they can invest in private equity funds, which are supporting mature, middle-market companies that are seeing profitability improve as AI creates efficiencies in their businesses or supply chains. Even real estate funds have AI promise, with the need to fund the data centers and power transformation to provide the building blocks of AI’s potential.
Stocks and bonds can’t fully capture the entire opportunity set, but alternatives give investors access to a broader investment universe. Are private markets for everyone? No; nor are they the only way to go. A diversified portfolio is generally the smartest approach, so, for many investors, the 60/40 allocation needs to create elbow room for some alts exposure. The right ratio is dependent on individual portfolios, goals, and suitability.
But the fact is that alternatives and private market opportunities need to be a permanent part of accredited investors’ thinking and planning. The benefits of diversification and safety have been clear these past few years.
All investing has risk, but the riskiest move for many investors could well be to adhere to an advisor-driven playbook based on a formula that is past its prime. The 60/40 approach has not been what it was just a few years ago. Fortunately, there are alternatives.
Christian Salomone is Chief Investment Officer of Ballast Rock Private Wealth, an independent Registered Investment Advisor that provides holistic financial advice to accredited high-net-worth individuals. The firm, formed in 2022 by investment management firm Ballast Rock, focuses on offering objective, unbiased guidance with an enhanced focus on alternative investments.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.