The 60/40 portfolio, long the cornerstone of modern investment advice is undergoing a transformation. In his latest annual letter last week, Larry Fink, chairman and CEO of BlackRock, signals a shift that the industry cannot ignore: “Generations of investors have done well following this approach,” he writes. “But as the global financial system continues to evolve, the classic 60/40 portfolio may no longer fully represent true diversification.”
Fink’s call for a new “50/30/20” model integrating a greater allocation to alternatives is not just a passing suggestion. It reflects a growing consensus that a portfolio split between public equities and bonds is no longer sufficient to manage risk and deliver consistent returns in today’s markets.
The end of the ‘free lunch’
Diversification has often been called the “only free lunch” in investing, a term made famous by Nobel Prize-winning economists Harry Markowitz and William Sharpe. But in a world of heightened volatility, stretched valuations, and structural inflationary pressures, diversification must now go deeper than simply mixing stocks and bonds.
See also: The diversification dilemma: Is 60/40 dead?
The traditional 60/40 model thrived in an environment of falling interest rates and predictable monetary policy. Today, investors face a different reality, one where correlations between asset classes are rising and geopolitical, technological, and economic disruptions are frequent.
Adapting to market realities and volatility
Against a backdrop of renewed tariff uncertainty, market volatility, and the potential for geo-political upheaval with the return of Donald Trump to the White House, portfolios must be built to withstand sharper swings.
In this environment, strategies with an absolute return focus can play an increasingly vital role. By aiming to deliver positive returns independent of market direction, absolute return funds help dampen drawdowns and smooth portfolio volatility, offering a measure of stability when traditional assets are moving in tandem.
See also: Calastone: Investors pull record £3.5bn from UK equities in Q1
However, not all absolute return strategies behave alike. Diversification within the absolute return allocation is critical. A true portfolio approach, blending different styles, risk premia, and sources of return helps ensure that the allocation remains robust across different market cycles. Relying on a single manager or strategy can expose investors to concentrated risks just as much as traditional asset classes.
Alternatives, once viewed as the preserve of institutional investors, are now essential for broader portfolios. Private credit, real assets, infrastructure, and liquid alternative strategies are becoming indispensable tools to build resilience and unlock new sources of return.
Regulatory shifts demand greater precision
At the same time, advisers are grappling with an evolving regulatory landscape. In the UK, the full implementation of Consumer Duty has placed new demands on firms to prove suitability, demonstrate value, and deliver measurable outcomes for clients. Simply outsourcing asset allocation to off-the-shelf model portfolios may no longer be enough to satisfy regulatory scrutiny especially if those models fail to reflect a client’s unique circumstances or objectives.
See also: How behavioural analysis can help firms with Consumer Duty reporting
Customisation and transparency are no longer luxuries; they are necessities. Advisers must be able to show that their investment propositions are designed with the client’s best interests in mind and that they can adapt as those needs evolve.
Opportunity in disruption
Forward-thinking firms are already taking action by incorporating more flexible, diversified approaches that go beyond the old 60/40 rulebook. Thoughtful use of alternatives and absolute return strategies can help advisers build portfolios that are better aligned to today’s risks and tomorrow’s opportunities.
The message from the world’s largest asset manager is clear: the investment landscape is shifting, and advisers must evolve their propositions accordingly. Those who embrace this change, incorporating alternatives and personalising client solutions will not only meet regulatory expectations but also deliver better outcomes for their clients.
The 60/40 model served its purpose for decades. But as Fink reminds us, the future belongs to those who are willing to rethink the fundamentals of diversification.
Steve Brann is CIO of Apollo Multi Asset Management
This story was written by our sister title, Portfolio Adviser
