Why the 60/40 portfolio is losing ground

The 60/40 portfolio is breaking down and alternatives are stepping up. With stocks and bonds increasingly moving in the same direction, investors are being forced to rethink diversification.

There are a number of reasons why alternatives have become more important in wealth management. Chief among them is the breakdown of a long-held assumption: that stocks and bonds move in opposite directions and therefore provide dependable diversification. For years, that inverse relationship propped up the 60/40 portfolio as a reliable choice, explains Ken Shoji, chief investment officer at View Capital Advisors.

For the better part of two decades, stocks and bonds maintained a negative correlation, offering investors a reliable diversification strategy. But that relationship flipped beginning in 2019, with both asset classes increasingly moving in the same direction. In 2019, 2020, 2023, and 2024, stocks and bonds rose in tandem − while in 2022, they both declined. In fact, 2022 marked the worst year for the 60/40 portfolio since 2008, with many variations declining more than 15 percent, according to Forbes.

The once-stable balancing act between equities and fixed income has unraveled, leaving traditional diversification strategies struggling to deliver. This convergence has investors searching for solutions beyond the conventional.

“A lot of investors have looked to alternative investments as a way of escaping that strong correlation,” Shoji says.

Increased access and a growing menu of options have helped fuel this shift. Retail investors once barred by high capital requirements and accreditation thresholds now find themselves welcomed into the alternative space by way of interval funds and other accessible structures.

“You can just be a non-accredited investor and invest $5,000, $10,000 in these alternative products,” Shoji says. “That’s cracked open a once-exclusive space.”

And the market is expanding rapidly. Alternative assets under management are projected to reach $24.5 trillion by 2028 − up from $13.7 trillion in 2021, Forbes. That surge underscores just how mainstream alternatives have become for investors looking to diversify beyond traditional asset classes. But alternatives should hardly be novel.

“We’ve been investing in alternatives for over 20 years now, since our founding,” Shoji says. “While we create portfolios incorporating both traditional and alternative investments, we can tap into a much broader range of non-traditional investment strategies today. View Capital has leaned into specialization, offering exposure to sectors like aircraft leasing, shipping, music royalties, litigation finance, and even Mississippi barges.”

“We’ve tried to stay ahead of the pack by offering products that are more specialized, more niche,” he explains.