The Traditional 60/40 Portfolio Is Showing Cracks. Here’s How Investors Are Adapting
The classic stock-and-bond portfolio is losing some of its balance, as bonds fail to provide the ballast investors expect
The average 60/40 fund has returned 8% in 2026, trailing the S&P 500’s 13%, while the Lehman Aggregate Bond Index is down roughly 0.2%. Treasury yields are adding to the pressure, with the 30-year yields hovering near two-decade highs.
Apollo’s chief economist argues the problem goes deeper than a bad year for bonds:
"The 60/40 portfolio is broken because equity returns are driven by AI concentration rather than the business cycle, while bond returns are now driven by fiscal constraints rather than cycle dynamics."
Torsten Sløk, Apollo
The bigger concern is diversification failing when investors need it most. In 2022, both sides of the portfolio sank at once, sending the average 60/40 fund down 14%.
Why bonds still earn their place
Before abandoning bonds entirely, consider what they actually do. The case for cutting them isn't as clean as it looks, according to Morningstar's analysis of stock-bond correlations.
Bonds can still do their job without moving in the opposite direction of stocks. In the market’s worst months over the past three years, stocks lost about 5% on average, compared with just 1.7% for core bonds.
That cushion is smaller than in prior decades, but it still creates rebalancing fuel: a chance to sell bonds and buy cheaper stocks after a selloff. The problem is concentration risk on the stock side, not bonds failing their core job.
How to restructure around the weak spots
One framework gaining traction is the total portfolio approach, or TPA, endorsed recently by the California Public Employees' Retirement System. Instead of splitting assets by type, it sorts them by role: growth or stability.
High-yield bonds and private credit move into the growth sleeve alongside stocks, while short-term Treasuries and investment-grade corporates anchor the stability side. The goal is a more predictable portfolio behavior that makes it easier to stay invested through rough stretches.
For those who want to stay closer to the traditional structure, there are two concrete adjustments worth making now.
First, shift some equity exposure toward sectors less dependent on the AI trade. Bank of America points to biotech and insurance, which have gained around 10% or more since June without relying on AI momentum.
Its strategists specifically recommend the State Street SPDR S&P Biotech ETF. The broader Health Care Select Sector SPDR ETF has gained nearly 17% over the past three months, while offering defensive exposure with relatively little connection to AI.
Second, look beyond stocks and bonds for another source of diversification. A BlackRock study found that putting 20% into liquid alternatives, including long-short equities and managed futures, lifted returns from 6.7% to roughly 9.2% at similar risk.
Commodities offer a simpler way to diversify. A Morgan Stanley analysis found that during the market shock following the US attack on Iran, a traditional 60/40 portfolio would have lost 3.6%, while one with a 5% commodity allocation gained 1%.
The Invesco DB Commodity Index Tracking Fund splits roughly half its exposure across energy, with the rest in agricultural products and metals.
For investors willing to make a bigger structural shift, the WisdomTree US Efficient Core Fund offers 90% exposure to US stocks and 60% to Treasury bonds through futures.
That frees up capital that would otherwise be tied to bonds, but adds risk when both markets fall together, as they did in 2022.
One investing pro who manages his own wealth keeps 40% in private markets, 40% in public equities, and the remaining 20% across crypto, gold, and cash, with no bonds at all. His reasoning is simple: money markets currently offer roughly the same yield as bonds with greater liquidity, weakening the case for bond funds.