Why the 60/40 Portfolio Struggles and What to Do Instead
I grew up hearing that a wise person never puts all their eggs in one basket.
Even as a young child in Paris, I practiced it before I fully understood it. When 20 French francs came my way, a few went into the piggy bank, a few were set aside for gifts for my family, and the rest bought trading cards of my favorite soccer players.
When I began as a quantitative analyst in the early 2000s, I discovered the science behind that proverb in Harry Markowitz’s 1952 paper Portfolio Selection. Markowitz showed that successful investing isn’t just about choosing the right eggs — it’s about choosing the right baskets.
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Portfolio risk depends less on what each holding does alone than on how the holdings move together.
That insight inspired the modern 60/40 portfolio, the stock-bond mix that has long been the standard of diversification for retirement savers. However, today, both baskets are becoming less effective diversifiers than many investors realize.
Let’s look at equities
On the equity side, if you own an S&P 500 index fund, you probably think you’re spread across 500 different companies. While that is technically the case, a small group of stocks has an outsized influence on your returns.
Semiconductor stocks reached a record 19.7% of the S&P 500 at the end of June, up from around 5% in mid-2020 and more than double the dot-com peak. That data comes from Citadel Securities strategist Scott Rubner via Yahoo Finance.
Our research at V-Square Quantitative Management has revealed a striking reality: The S&P 500 now provides diversification closer to holding roughly 50 equally weighted names than 500.
That’s why it’s important to “know your benchmark” and understand what you actually own. If the stock portion of your portfolio is increasingly driven by the fortunes of just a handful of companies, the traditional promise of a well-diversified 60/40 portfolio starts to break down.
Now let’s look at bonds
The bond side of the portfolio faces a different challenge. The 60/40 has historically worked based on a simple idea: When stocks are down, bonds would help offset the losses.
However, that assumption has become less dependable. Investors learned this the hard way in 2022 when both asset classes fell together, resulting in one of the worst years ever for a traditional balanced portfolio. According to Morningstar data:
- The S&P 500 fell 19.4%
- The core bond index lost 12.9%, its worst year on record
- A benchmark 60/40 blend dropped 15.3%
Recent research from State Street also suggests stocks and bonds are more correlated than they have been during much of the past decade.
The result is that investors can no longer assume the bond allocation will provide the same level of diversification it once did, making the traditional 60/40 portfolio less resilient during periods of market stress.
What’s the problem?
The problem isn’t that investors own too few assets, it’s that many of those assets are exposed to the same risks. In other words, there may be plenty of eggs, but not enough baskets, and investors need to look elsewhere for diversification.
Real assets have spent 2026 making their case. The Bloomberg Commodity Index returned 14.4% in the first half of the year, one of its strongest starts on record.
At the same time, the FTSE Nareit All Equity REITs Index gained 14.4% through late June, outperforming the S&P 500, while also offering a 3.7% dividend yield.
When several real asset classes are performing well at the same time, it suggests they’re being driven by long-term trends rather than a single short-term market event.
Part of what makes real assets appealing is how entrenched they are in everyday life. They include the toll bridge you crossed this morning, the airport you flew through last month, the nursing home caring for a parent, the data center powering every online search, the copper in your home’s wiring and the gold stored in vaults.
Their cash flows come from real things like tolls, leases, rents and regulated utility rates, rather than the earnings of technology companies.
Growing demand for physical assets
Ironically, the same AI buildout that has made the stock market more concentrated is also creating enormous demand for these physical assets. The International Energy Agency projects that electricity use from data centers will roughly double by 2030 after growing 17% last year, nearly six times the pace of overall demand.
Every new AI model needs power plants, transmission lines, land, cooling systems and critical minerals to operate. Investors who own the S&P 500 participate in the companies designing AI chips and software, but much of the infrastructure making that growth possible sits outside the index. Owning those assets can provide exposure to a different set of return drivers.
There are several ways individual investors can add real assets to a portfolio. The simplest is through low-cost index funds and ETFs, which generally fall into four categories:
- Commodities, which invest in raw materials like energy and metals
- Natural resources, which own the companies that produce those materials
- Infrastructure, which invests in assets such as toll roads, airports, pipelines and utilities
- REITs, which own income-producing real estate including warehouses, data centers and housing for older people
Rather than betting on a single asset like gold, investors may benefit more from owning a diversified mix of these sectors because each tends to respond differently to changes in the economy.
One final consideration is taxes. REIT dividends are generally taxed as ordinary income, and many broad commodity funds can be less tax efficient than traditional stock funds, making them good candidates for an IRA or other tax-deferred account when possible.
The bottom line
Real assets are not a substitute for stocks and bonds, nor are they immune to volatility. Bloomberg’s midyear review notes the commodity index finished June 14% below its May peak, so anyone who bought after the rally quickly experienced the downside.
Investors should establish a target allocation they’re comfortable holding through different market environments, rebalance periodically and resist the temptation to chase whichever asset class is leading at the moment.
In 1952, Harry Markowitz gave mathematical form to the advice I heard as a child. More than 70 years later, that principle still holds: Diversification is about putting your eggs in different baskets.
The question for today’s investors is whether the baskets they own truly answer to different economic forces.
