For decades, the 60/40 portfolio formed the backbone of investment management. By combining 60% equities with 40% government bonds, investors sought long-term growth while relying on fixed income to provide stability during periods of market stress.
The underlying assumption was simple: when equities fell, government bonds would rise, cushioning portfolio losses.
However, recent market experience has challenged this long-held belief and prompted investors to reassess whether traditional diversification frameworks remain fit for purpose.
When bonds stop diversifying
The historic negative correlation between equities and government bonds has been an important feature of markets over the past several decades. Yet it is increasingly clear that this relationship cannot be relied upon across all market environments.
The best example came in 2022. As inflation surged and central banks aggressively raised interest rates, both equities and government bonds suffered double-digit losses.
Rather than offsetting one another, both asset classes moved lower together, delivering one of the most challenging years for traditional balanced portfolios in decades. Similar dynamics briefly re-emerged in March 2026, when concerns over global growth and trade policy weighed on both equities and bonds simultaneously.
These episodes highlight an important reality: diversification based solely on historical asset-class relationships can be unreliable. Market behaviour is shaped by economic conditions, inflation, monetary policy and investor expectations, all of which evolve over time.
As a result, investors increasingly need to focus on where returns are truly coming from and how different return drivers are likely to behave across a range of economic environments. Understanding these drivers is becoming just as important as selecting the underlying assets themselves.
The limits of alternatives
Unsurprisingly, concerns around traditional diversification have fuelled growing interest in liquid alternatives. Trend-following, global macro and multi-strategy funds have all attracted capital as investors search for sources of return that are less dependent on the direction of equity and bond markets.
The attraction is understandable. In theory, these strategies should improve diversification and reduce portfolio volatility. However, moving beyond 60/40 does not necessarily mean allocating more capital to alternatives for the sake of doing so.
Our analysis suggests that many liquid alternative strategies have struggled to consistently improve portfolio outcomes despite their attractive theoretical characteristics. Some have delivered strong returns during specific market regimes, but many have failed to provide reliable protection during broader periods of market stress.
This reinforces an important principle: true diversification is not achieved simply by owning more asset classes. It comes from accessing genuinely distinct and independent sources of return.
Investors should therefore focus less on investment labels and more on the underlying drivers of performance. A portfolio can contain numerous strategies yet remain vulnerable if those strategies are ultimately exposed to the same macroeconomic risks. The challenge is not building a more complex portfolio but building a more resilient one.
The objective should be to build portfolios with multiple return drivers capable of performing differently as economic conditions change, rather than relying on a simple combination of equities, bonds and alternative funds.
Finding different return drivers
Credit is one area we believe remains particularly attractive. Reflecting our institutional heritage and long-standing expertise, credit plays a larger role in our portfolios than it does for many peers. In particular, we favour high-quality, short-dated and floating-rate credit over long-duration fixed income.
This reflects a belief that income generation is often a more reliable source of return than duration exposure. Long-dated government bonds remain highly sensitive to changes in interest-rate expectations, whereas shorter-dated and floating-rate instruments can provide more resilient income streams with lower interest-rate risk.
Insurance-Linked Securities (ILS) are another compelling opportunity. Unlike most traditional investments, ILS returns are driven primarily by insurance risks rather than economic growth, equity markets or interest-rate movements.
As a result, ILS can provide genuinely differentiated diversification benefits. Their resilience was particularly evident in 2022, when global equities and bonds suffered substantial losses while the Swiss Re Global Cat Bond Index was only marginally negative.
More recently, catastrophe bonds generated positive returns of approximately 1.8% during the first quarter of 2026, remaining largely insulated from the volatility affecting traditional financial markets.
Private markets also continue to offer a compelling long-term investment case. As companies remain private for longer, public market investors increasingly risk missing significant phases of value creation that were once captured through listed equities.
Private equity, private credit and other private-market strategies provide access to these opportunities while also offering exposure to the illiquidity premium available to long-term investors. As access to private markets continues to broaden, they are becoming an increasingly important source of differentiated returns.
Beyond 60/40
The future of diversification is unlikely to be defined by a fixed split between equities and government bonds. Instead, it will be shaped by a broader and more flexible approach focused on accessing multiple independent sources of return. The most resilient portfolios are unlikely to be those with the greatest number of holdings, but those built around genuinely different drivers of risk and return.
Diversification is becoming less about asset allocation labels and more about understanding what truly drives performance. Investors who can build portfolios around genuinely distinct sources of return should be better positioned to navigate an increasingly uncertain investment landscape.
Daniel Nilsson is a senior portfolio manager at Isio Wealth Management. The views expressed above should not be taken as investment advice.