Key takeaways

1. Resilience and doubts about the 60/40 model

The 60/40 equity-bond model isn’t dead, but advisers are increasingly exploring news allocation models

2. Shift toward alternatives and reduced fixed income weightings

Advisers are increasingly reallocating from bonds to alternatives, with many now favouring lower fixed income exposures, such as 60/20/20 or 40/30/30 models, seeking greater diversification and risk control.

3. Fixed income’s unpredictable role and adviser uncertainty

Recent environments have seen bonds fail to provide expected protection. Interest rates drive allocation decisions, but advisers admit difficulty forecasting them, prompting further re-evaluation of traditional portfolio construction.
 

Many obituaries have been written for the 60/40 model, yet it has had surprising resilience as the default equity/bond setting for a balanced investor. However, there are signs that the legacy of a low yield environment, shifting correlations and unpredictable returns are finally starting to shake advisers’ faith in this approach. A recent fixed income report from BNY Investments in collaboration with NMG Consulting¹, shows a discernible change in advisers’ allocations.

The majority of advised clients fall into the ‘balanced’ category. The report shows that around half (52%) of advised clients have moderate or balanced risk profiles, while a further 25% are in the defensive or cautious categories. This explains the focus on the right asset allocation for this type of client. Get it right, and most clients will have a good experience.

A 60/40 weighting has often been the default option, with the expectation that fixed income will deliver protection during equity market downturns, while equities will deliver the long-term growth that investors need over time. The report shows that this balancing effect is seen as key for smoothing returns over time and helping advisers keep clients invested. “The psychological role of fixed income is very important: providing security and downside protection for client confidence,” said one adviser.

However, problems have emerged with the fixed income side of this equation. The recent macroeconomic environment has disrupted the view that fixed income will be a balancing force for equities in all conditions. While bonds may provide diversification to equities in a normal recessionary environment, they did not protect investors in 2022 as inflation spiked, and interest rates rose. Instead, equites and bonds fell in unison.

This has left an impression on advisers: “The challenge with bonds has been that you used to have a traditional 60/40 or 50/50 portfolio and the aim was to diversify. However, equities and bonds tend to be so closely correlated now,” observed one adviser. It didn’t help that many of the most popular 60/40 options were heavily weighted to both the S&P 500 and US government bonds, both of which proved highly correlated to interest rate movements.

Advisers have also had to contend with the legacy of the prolonged low-yield environment in the aftermath of the global financial crisis. The characteristics of fixed income changed. Investors increasingly turned to equities and alternatives to deliver income because bonds had no yield attached.

This naturally encouraged a lower weighting to fixed income. While fixed income holdings have been rising more recently, only 4% of advisers are allocating more than 40% to fixed income, while 40% of advisers report allocations of 21-30%. This suggests advisers continue to rethink the bond side of the traditional 60/40 allocation.

This lower weighting can be partly attributed to the rising role of alternatives. Investors have turned to areas such as infrastructure to perform some of the traditional functions of fixed income. Some asset allocators have made a case for 60/20/20, with half the fixed income allocation transferred to alternatives or for a lower risk approach, models such as 40/30/30 equities/bonds/alternatives. Most advisers aren’t there yet, but the report suggests this approach may be building momentum.

Assessment

Another factor in advisers slowly moving away from the 60/40 approach may be that their fixed income holdings haven’t always behaved as they expected. For example, the interest rate outlooks was reported to be the key swing factor for advisers in determining how much they allocate to fixed income, yet few consider themselves good forecasters of interest rate movements.

Equally, many have been surprised by the meaningful performance differences during the bond market sell-off. As one adviser observed, “Something that was not expected to be volatile was suddenly very volatile. It brought into light that changes can happen in the market and that a flexible approach to fixed income is needed.”

Fixed income hasn’t necessarily done what investors expected– provide diversification from equity markets and smooth returns to investors. Instead, it proved almost as volatile as their equity market allocation. This is particularly true for some strategic bond funds, where investors had selected them for diversification, but the experience they received was very different. Rather than shift allocation within fixed income, they have reduced their overall holdings.  

What happens from here?

Is the 60/40 model permanently broken? No, though there is unquestionably a growing movement towards the inclusion of alternatives. Many of the traditional characteristics of fixed income have been restored: it now offers far higher income, for example. At the same time, interest rates have normalised and inflation is, if not vanquished, then at least looking more benign.

However, advisers need to ensure that their fixed income holdings are fulfilling their intended role in a portfolio. This may require closer examination. If an adviser needs bonds for income, diversification, or capital stability, does the fund manager share these same objectives? Fixed income encompasses a broad range of strategies and can offer varying risk and return profiles. It is crucial that advisers understand each fund's specific objectives, the conditions under which it performs well, and how it will correlate with equity markets.

Greater diversity within fixed income allows for more granular and targeted fixed income allocations. Active management, duration flexibility, and diversification beyond traditional bonds have emerged as key pillars of this new fixed income toolkit. The 2022 experience has accelerated this evolution, creating real opportunities to fine tune portfolios for indivudual investor needs.

However, it has also brought a greater need for vigilance and strong analysis. An allocation to fixed income won’t provide a portfolio ballast by itself in all market conditions: it needs to be the right fixed income, at the right time, with risk management built in. This may require a more active approach and a deeper understanding of what’s going on under the bonnet of any fixed income allocation.

The value of investments can fall. Investors may not get back the amount invested. Income from investments may vary and is not guaranteed.

¹Shaping tomorrow’s portfolios: The strategic role of fixed income, published in June 2025.