Is it time for investors to rethink 'balanced' portfolio?

The Herald Scotland

19-07-2025

Looking at the classic 60/40 portfolio, equities tend to be significantly more volatile than bonds, meaning they contribute disproportionately to portfolio fluctuations.
Add to that the fact that the equity portion is often dominated by a handful of tech giants, and the picture becomes even more skewed.
For example, the top 10 US companies in the S&P500 account for nearly 40% of the index, with technology companies making up an even higher share.
What many investors perceive as diversified is, in fact, highly concentrated.
Looking outside of US markets for diversification may seem like a logical step, but global equity benchmarks have also become increasingly US-centric.
In the 1980s, the US made up about one-third of the MSCI All-Country World Index (ACWI). Today, it accounts for some two-thirds. This shift means that even international portfolios are heavily influenced by US market dynamics.
Historical data show that every major correction of 10% and more in US equities over the past 30 years has coincided with similar or worse declines in international stocks.
In other words, geographic diversification may not offer the protection investors expect during market downturns.
We believe that expected returns, especially from the equity component of the 60/40 strategy, at least if it's left predominately in US equities, are unlikely to deliver what investors are looking for over the medium to long term. The starting valuations are high and so our long-term returns forecasts are low (sub cash over 10 years).
But added to that, over the past few years the equity-bond correlation has started to turn increasingly positive, meaning that equities and bonds have had a tendency to behave similarly.
This is a stark change to when 60/40 portfolios became the norm, when correlations were negative.
Why the change? We have seen more inflation shocks hitting the global economy – from things like volatile geopolitics, supply chain disruptions, and climate change. Inflationary shocks push up on inflation and down on growth, so they push up on bond yields (which means they push down on bond prices) and down on equity prices. We believe these sorts of shocks will become more common in the future.
To genuinely reduce the risk of large drawdowns, investors need to think beyond the number of holdings and focus on the underlying risk factors driving returns.
A portfolio with thousands of securities may still be vulnerable if those assets are all influenced by the same economic forces.
One alternative is a cross-asset strategy that allocates across equities, bonds, currencies, commodities, and gold – balancing each asset's contribution to overall portfolio risk. A model portfolio could include: Equities, bonds (US 10-year treasuries), private markets such as infrastructure, real estate and private equity; commodities; and gold.
Of course, avoiding large losses is critical to compounding returns and preserving wealth – especially for those nearing retirement or needing access to their savings.
By focusing on true diversification across uncorrelated risk factors, investors can build portfolios that are more resilient to shocks and better positioned for long-term success.
Of course the challenge is to build portfolios that truly have that full balance of risk, and the importance of private markets to diversify and help people build long term financial resilience is very much on the political agenda. There is no question that we need more solutions for investors and slowly, choice is opening up, particularly when it comes to pensions.
Maximilien Macmillan is head of macro investments at Aberdeen