The 60/40 Portfolio is Dead, Long Live 60/40

The 60/40 equity-bond portfolio has been pronounced dead, only to thrust its skeletal hand through the cemetery turf, more times than an Evil Dead bit-part player.

It was looking decidedly peaky the previous decade. Prior to Covid, low bond yields had pushed investors to find alternative sources of income, with at least one major asset manager floating property as a potential alternative in a new multi-asset paradigm. That seems to have vanished “like tears in the rain”. Then the inflationary spike from 2022 made bond investors suffer, as the worth of that 40% came under significant pressure.

While diversification is famously the only free lunch in finance, the meal was beginning to look rather past its sell-by date.

A look at history tells you that equity/bond correlations are neither stable nor reliably negative. How well bonds insulate a portfolio against shocks depends on the nature of that shock: for example, whether the market is pricing a growth or an inflation shock. In growth shocks, equity cash-flow expectations fall, but bonds typically rally as investors seek safety and price in rate cuts; correlation, therefore, falls or turns negative. In inflation shocks, bond yields rise and equity valuations de-rate at the same time; correlation, therefore, rises. Inflation, fiscal risk, term premia, central-bank action, and energy shocks all determine whether bonds behave as diversifiers or as another duration-risk asset.

Bonds are both. But that’s not a new thing, and the 60/40 portfolio has been through a great many market cycles.

Cross-asset correlations had broadly been declining between 2022 and 2025, but have trended upwards over 2026. Rolling 52-week equity and bond correlation is around +0.4, in contrast to a 10-year trend of -0.2, implying less protection from bonds in a balanced portfolio, according to FTSE Russell research from June 2026.

One theme to rule them all

For corporates, strong balance sheets and earnings growth driven by AI optimism has meant that equities and credit have both rallied, in contrast to government bonds, where fiscal pressure, geopolitical instability, and high term-premia keep yields elevated. That goes some way to explaining why corporate spreads are so tight: the perceived additional risk of government bonds pushes yields out, rather than simply rich corporate valuations tightening spreads (though the two aren’t mutually exclusive).

However, the FTSE Russell research also found that correlations between equity markets are near 10-year averages, although one-year rolling correlations between the FTSE USA and other major indices are relatively low versus their history, implying greater benefits from broad equity diversification. The exception is emerging markets (EM), as their correlation to developed markets (DM) has sharply increased. This could be exacerbated because equity markets have increasingly been marching to the beat of the same drum—that drum being AI-themed, with key Asian markets, both EM and DM, key links in the hardware supply chain.

It’s also worth noting that, while we’d all like the correlations between the different buckets of our portfolios to be significantly negative, even positive correlations of less than +1 offer some diversification benefits. While the portions maybe smaller, you’re still getting free food.

Let’s look at how these diversification benefits have panned out in the “average” mixed-assets portfolio.

Death Becomes Her

In performance terms, the Investment Association sector equivalent of the 60/40 portfolio, Mixed Investment 20-60% Shares, has pretty much behaved as one would expect. Over the past 20 calendar years, there have been four negative years for mixed assets in aggregate (chart 1). In three of those periods, losses have varied in proportion to the proportion of equity. The exception is 2022, where losses of the three sectors varied by just over half a percentage point, but with 20-60% faring best.

Chart 1: Annualised Mixed Investment Returns by IA Sector v FTSE All World TR Index (2006-2025)

Source: LSEG Lipper

Over three, five, 10, and 20 years, annualised cumulative returns are also in line with equity exposure, with the FTSE Russell All World equity index included for comparison (chart 2). And, finally, maximum drawdown over 20 years also varies in direct proportion to equity exposure (chart 3).

This is also in line with their risk, as measured by three-year standard deviation to the end of June: 0-35% has an average SD of 1.44; 20-60% is 1.88; and 40-85%, 2.44. In terms of risk-adjusted return, as measured by three-year Sharpe ratio, 20-60% has the highest (0.18, as opposed to 0.17 for 40-85% and 0.13 for 0-35%), although all lag the FTSE All World Sharpe over the period.

Chart 2: Cumulative Mixed Investment Returns by IA Sector v FTSE All World TR Index (2006-2025)

Source: LSEG Lipper

Chart 3: Maximum Drawdown over 20 Years: Mixed Investment Returns by IA Sector v FTSE All World TR Index (2006-2025)

Source: LSEG Lipper

Don’t mess with Mr In-Between

Mixed asset classifications have, therefore, behaved broadly as intended. Over the long term, there’s still a good case to be made for the 60/40 portfolio. But, as the man said, in the long term we’re all dead. How, then, have investors reacted to the frequently unforgiving market conditions over the past few years?

Over the 10 years to the end of 2025, the equity-heavy Mixed Investment 40-85% Shares sector attracted £19.57bn, while Mixed Investment 0-35% Shares took the far more modest £1.53bn. The Mixed Investment 20-60% Shares sector, however, saw redemptions of £8.74bn.

Over the latest three-year period, all three sectors have suffered redemptions, although for the higher and lower equity sectors, this has been in the range of -£2.5bn to -£2.7bn. Mixed Investment 20-60% Shares in contrast shed £9.42bn. So, whatever the fortunes of mixed assets as a whole, that bit in the middle has suffered most. This seems a little incongruous, in a world where most people wind up somewhere in the middle when it comes to filling out the risk appetite section on client questionnaires.

Sharp declines in 60/40 portfolios happen, but rebalancing means that they recover when markets do. In an investment world that’s often bedazzled by the next big thing, or more bells and whistles (a cynic might wonder to what degree that’s because you can charge more for them), while 60/40 may not be sexy, these funds have, in the round, delivered on expectations.