Building Portfolio Resilience: Why Today’s Approach Needs a Rethink

By: Remi Olu-Pitan, Schroders

Increased correlations between stocks and bonds and heightened volatility in bond markets have made the traditional 60/40 approach to diversification less reliable. Today’s market conditions call for an approach that includes alternative asset classes, such as private markets and commodities, which could help enhance returns and deliver more dependable diversification.

For decades, diversification strategies focused on the two traditional asset classes: stocks and bonds. The use of these assets evolved significantly, but they remained core building blocks. Two critical factors had to remain in place, however, for this diversification approach to keep working: a low correlation between the two asset classes and limited volatility for bonds, given the reliance on them as a source of stability. Neither factor is in place today. 

The era of simplistic portfolio construction – with its reliance upon asset class assumptions that no longer hold true – is over. Creating resilience within portfolios requires a new approach.

Why Traditional Diversification Falls Short

In the “safety-first” period after World War II, investors considered capital preservation their top priority, and portfolios were weighted heavily toward fixed income. As the long-term growth that equities could deliver became increasingly apparent in subsequent decades, the 60/40 approach to diversification emerged. Even as investors pursued the higher long-term gains stocks offered with a 60% allocation to equities, keeping portfolios 40% invested in fixed income proved a reliable means to achieve stability. 

Since 2022, however, bonds’ returns have been much less predictable and that has made them less dependable as a source of stability. At the same time, stock and bond markets are moving together more often, particularly during periods of heightened inflation, rapid changes in interest rates and geopolitical tensions. A dramatic example of the potential risks this creates came in 2022 when the 60/40 portfolio lost nearly 18%, its worst performance since the Great Depression. Clearly, a new approach to constructing resilient portfolios is necessary.

What’s Behind These Changes?

The old assumptions about diversification no longer hold true because of several long-term trends and resulting market conditions that could extend into 2026 and beyond.

• Increasing government debt: Political reluctance to address the issues of mounting government debt, which has soared in developed economies, has created uncertainty in markets that were once considered secure and reliable.
• Aging populations: In most developed and several emerging markets, aging populations and shrinking workforces have exacerbated government debt challenges.
• A “higher for longer” interest-rate environment: Even without the potentially inflationary U.S. tariff proposals laid out by the Trump administration, several factors could keep inflation high. These include tight labor markets and lingering supply chain constraints. Even if central banks continue to lower rates, lingering inflation will likely prevent short-term rates from returning to the near-zero levels seen for a prolonged period after the Global Financial Crisis.

These factors have combined to reshape both equity and bond markets, reducing the effectiveness of the diversification strategies that previously delivered reliable returns.

Adapting Portfolio Construction for the Current Era

To build more resilient portfolios, we believe investors need to embrace three key principles:

Rethink the role of bonds. Bonds’ primary function is now to generate income, rather than provide downside protection. Investors could benefit from adding less traditional income sources, such as private debt and mortgage-backed securities, which can perform well in rising interest rate environments and have less correlation with public markets.

Recognize active management is essential. Passive investing alone is unlikely to succeed in this environment. When the drivers of market returns shift from broad macroeconomic trends to specific company and industry fundamentals, finding the most promising securities (as active managers do) becomes more critical than simply obtaining the broad market exposure passive strategies provide. 

Broaden diversification to include alternative asset classes. To achieve meaningful diversification, investors should look beyond traditional asset classes and incorporate alternatives such as private equity, private debt, and real assets (the latter includes commodities, infrastructure, and real estate investments). These alternative asset classes can provide enhanced diversification because the drivers of their returns are quite different from the factors that influence publicly traded stocks and bonds. These nontraditional markets can carry additional risks. Private markets, for example, are often less liquid. It is important for investors to thoroughly understand the reward and risk profile of any alternatives investments they consider.

Time to Embrace a Broader Set of Tools

Ongoing volatility, rising correlations between asset classes and profound economic changes call for a more robust approach to diversification today. By embracing a broader set of tools, investors can better position their portfolios to weather volatility and capitalize on opportunities for more reliable returns, even as the financial landscape continues to evolve.

Bio: Remi Olu-Pitan is Head of Multi-Asset Growth and Income for Schroders. She is responsible for Multi-Asset Income and Diversified Growth mandates. Remi joined Schroders in 2006 and is based in London. Remi is a voting member of the firm’s Global Asset Allocation Committee. A CFA Charterholder, she earned a Masters in Statistics from the London School of Economics and a Bachelor’s in business finance from Durham University.

Disclosures: All investments involve risk, including the loss of principal. Past performance provides no guarantee of future results and may not be repeated. Diversification cannot ensure profits or protect against loss of principal. The views shared are those of the author and may not reflect the views of Schroders Plc or any of its affiliates. Information herein has been obtained from sources we believe to be reliable but Schroders Plc does not warrant its completeness or accuracy. No responsibility can be accepted for errors of facts obtained from third parties. Reliance should not be placed on the views and information in the document when taking individual investment and / or strategic decisions. Any mention of industries or sectors is for informational purposes only and should be interpreted as a recommendation to invest or divest in any company or adopt a particular investment strategy. Schroder Investment Management North America Inc, registered as an investment adviser with the SEC, CRD Number 105820.