Rethinking the 60/40 split – avoiding the wickedly volatile

19 October 2023

Achieving the right blend of investments for retirement portfolios can no longer be satisfied by the classic 60/40 split between equities and bonds, more careful selection is required, argues Ryan Medlock, senior investment development manager, Royal London.


Market turbulence over the last 18 months has challenged plenty of conventional attitudes towards investing, or at least the ones that have worked in recent years. Coupled with high inflation, which is causing a squeeze on real income, saving for retirement has never looked such a daunting commitment, and UK savers need investment solutions that can guide them through headwinds which haven’t been seen in decades. This shift requires broader asset class diversification and disciplined active management within a robust framework – now more than ever.

It’s widely acknowledged that an actively managed portfolio offering broad diversification across both asset classes and geographical regions can help generate returns and protect capital as we move through the business cycle and the variety of market conditions that cycles will throw our way. A broadly diversified approach can capture upside from a wider range of investment opportunities provided by a variety of market sectors and regions globally, whilst also helping to cushion any potential downside. The element of active management then introduces further flexibility by not forcing hands into the more crowded trades in which passive investment solutions are obliged to invest.

For many years, the 60/40 balanced portfolio of global equities and bonds served savers well as disinflationary forces drove falling bond yields, and equities benefitted from long-term economic expansions. However, the post-pandemic trend of rising inflation means the 60/40 portfolio no longer offers savers the diversification needed to strengthen the resilience of their holdings and provide returns while effectively managing volatility.

Indeed, I’d argue that the 60/40 approach is no longer enough to deal with the broad range of market and inflationary shocks investors face. We have grown used to seeing government bonds provide diversification by delivering positive returns in market downturns, softening the blows from losses in equities, but 2022 proved that both can fall at the same time. Diversification beyond global equities and bonds is of paramount importance because we don’t know what the future holds. Savers need enough resilience to be confident that their investment solution will perform for them as we move through the business cycle and a variety of market conditions.

Diversification works effectively by spreading investments across a range of asset classes which are expected to respond differently in various economic environments. In today’s challenging market, a sea change to the last 10 years of disinflationary growth alongside accommodative policy (when central banks expanded the money supply to boost the economy), it’s more important than ever to have exposure to investments which provide greater resilience to inflationary market shocks.

So, what are the inflation resilient asset classes that should be considered within a broadly diversified investment solution?

Commodities: Provides low correlation to both equities and bonds, is directly linked to inflation through exposure to a basket of energy, agriculture and metals and provides a hedge against geopolitical shocks.

Commercial property: An income-producing real asset, as rental payments tend to rise with inflation.

UK equities: This market tends to do well in a rising inflation environment due to the relatively high allocations to the resource and financial sectors compared with global peers.

Broad diversification isn’t simply investing in everything across the board. Some asset classes such as cryptocurrencies, for example, are wickedly volatile and very hard to analyse relative to other assets. It’s about getting the right blend of investments that are going to provide resilience and opportunity as we move throughout the business cycle, and it takes more than just equities and bonds to achieve that now.








Professional Paraplanner