60/40 is performing again. But is it doing what it is supposed to?

In 2022, the traditional 60/40 equity-bond portfolio experienced an unusually difficult period. Equities and bonds fell together as inflation rose and central banks increased interest rates, prompting claims that the combination was no longer fit for purpose.

Subsequent performance suggests those claims were premature. From January 2022 to August 2026, an illustrative 60/40 portfolio returned approximately 33.6%¹, driven by global equities which returned approximately 65% and offset a -3.8% decline in global government bonds.

Equities driving the recovery is not itself a problem: they are the portfolio’s main growth engine. The more important question is whether bonds can still provide protection when equities fall.

Here we tackle two questions. Were concerns about 60/40 overblown, or have strong equity returns concealed a change beneath the surface? And, if its historical diversification properties have become less dependable, do investors understand the risks they are accepting when they continue to use it as their default portfolio?

Why has 60/40 endured as a successful investment approach?

The simple 60/40 portfolio was not designed to maximise returns in every environment. Rather, it offered a practical compromise between growth and resilience.

Equities supplied the main source of long-term capital growth, while bonds offered income, liquidity and generally lower volatility. Their combination was particularly valuable because the correlation between their returns was historically low and, at times, negative. Thus, in periods where one declined, this was dampened by the strong performance of the other.

During many growth-led downturns, weaker corporate earnings placed pressure on equities while lower interest-rate expectations supported bond prices. Bonds could therefore cushion losses and provide a relatively resilient asset from which to meet commitments or rebalance into cheaper equities.

The power of 60/40 lay in combining two assets that often responded differently to the same economic news. Its simplicity, liquidity, transparency and relatively modest governance burden strengthened the case.

The relationship changes according to the environment

The complication is that correlation, the extent to which two assets move together, is not fixed over time. It changes with the economic environment and with the relative attractions of equities and bonds.

When inflation is low and stable, disappointing growth may hurt equities but support bonds through expectations of lower interest rates. An inflation shock is different. Higher inflation may require higher rates, pushing existing bond prices down. Equities can also suffer as discount rates and borrowing costs rise.

This was the central problem in 2022: the same shock affected both sides of the portfolio. From January 2022 to October 2023, stock-bond correlation was meaningfully positive at +0.62 and both assets declined in 11 of 22 months. By comparison, there was only one month in each of the dot-com bust and global financial crisis periods in our analysis where both assets declined.²

What has the recovery concealed?

Across the wider period from January 2022 to August 2026, equities rose by approximately 65%, and the 60/40 portfolio returned more than 33%. Against those solid returns, investors may have had little reason to question the relationship between the two assets, however, over the period, stock-bond correlation was positive at +0.53.

The portfolio’s recovery was therefore heavily dependent on equities. Bonds provided less consistent protection, although strong equity returns left the portfolio comfortably ahead, making the weaker diversification less conspicuous.

Strong equity returns cannot be relied upon to compensate for weak bond performance. If equities weaken while bonds also fall, both parts of the portfolio could come under pressure.

In a prolonged period of drawdown, this is particularly relevant to fiduciaries and organisations that rely on portfolios to fund spending commitments. If both assets are depressed, withdrawals may crystallise losses and reduce the capital available to participate in a recovery.

Looking beyond the headline return

The evidence does not suggest that 60/40 is dead. However, its strong recent performance does not prove that its historical diversification properties have returned since the inflation shock of 2022. Equities still offer long-term growth, while bonds can provide income, liquidity and contractual cash flows. Nor is greater complexity automatically better: a simple equity-bond portfolio remains liquid, transparent and relatively straightforward to oversee.

Those responsible for asset allocation need to understand the role assigned to each component and assess how the portfolio might behave if equities and bonds both disappointed at the same time. Forecasting the next correlation regime is less important than having a resilient portfolio in place that can weather a storm, wherever it comes from. Investors holding a 60/40 portfolio should be asking what is providing the resilience in their strategy.

Sources

¹ The analysis uses broad global equity and hedged global government-bond total-return series in sterling. The illustrative portfolio allocates 60% to equities and 40% to bonds, is rebalanced quarterly and excludes costs and taxes.

² The selected periods are:

• 31 March 2000 to 30 September 2002 for the dot-com bust;
• 31 October 2007 to 31 March 2009 for the global financial crisis;
• 30 April 2010 to 31 July 2012 for the euro-area crisis;
• 29 February 2020 to 31 December 2021 for the COVID-19 pandemic and recovery;
• 31 January 2022 to 31 October 2023 for the inflation and rate shock; and
• 31 January 2022 to 31 August 2026 for the wider post-2022 regime.

Correlations are calculated using monthly returns within each defined period.