Breaking away from 60/40: How alternatives are reshaping investing

For decades, the 60/40 portfolio was considered the cornerstone of sound, balanced investing because it offered a mix of growth and stability that stood the test of time.  

But in recent years, that traditional model has been challenged like never before. When I look back over the past four years or so, including the turbulence of 2022, the performance of bonds has been especially eye opening.  

The US bond aggregate index, for instance, has actually been slightly negative over that time period. Bonds are supposed to be the safe part of a portfolio; the part that provides consistency when markets get rough. But, during this stretch, they’ve lost value. 

In 2022, we witnessed one of the worst years ever for the 60/40 model. Stocks were down, and bonds were down even more. For many investors, that was a wake-up call. When both sides of your ‘balanced’ portfolio are in the red, it’s natural to question whether the old rules still apply. 

Why the 60/40 Isn’t Working the Same Way 

The problem isn’t that the 60/40 portfolio is broken; it’s that the world around it has changed.  

The spike in interest rates in 2022 was one of the sharpest we’ve ever seen, and since bond prices move inversely to interest rates, existing bond values dropped fast. A lot of investors didn’t fully understand why their ‘safe’ investments were suddenly in the red. 

Now, for anyone buying bonds more recently, the story is a bit different. With higher interest rates, new bonds are paying better yields. So the next few years might look much better for bond investors.  

But that doesn’t change the fact that many people lost confidence in the idea that bonds can always serve as a stabilizer, which has opened the door for greater interest in alternative investments. 

The Rise of Alternatives 

When I first started in this business, it was all about stocks and bonds, while alternatives were largely reserved for institutions or ultra-wealthy investors.  

But times have changed and we’ve seen a real democratization of investing recent regulatory changes allowing 401(k) plans to include access to private equity and other alternatives. That means a much broader segment of investors can now own assets that were once off-limits.  

This accessibility can be a good thing, but it also creates new challenges. Many investors don’t really understand what they’re buying when it comes to alternatives, and these investments can behave very differently from traditional assets. 

What Clients Are Asking For 

Interestingly, most clients don’t come to me asking specifically for “alternative investments.” Instead, they’ll say something like, “Todd, is there something different we should be looking at?” 

That’s usually where the conversation begins. There’s a natural curiosity; people want to know what’s out there that might help them achieve better returns or reduce volatility. 

From my perspective, part of my role as an advisor is to bring new ideas to the table, not just react to what clients are hearing elsewhere. We need to be ready to introduce clients to new ideas, but only after we’ve done our homework and know what’s best suited to their tastes and needs. 

What We’re Using 

At my firm, one of the main alternative strategies we use is structured notes, which sit somewhere between equities and fixed income.  

They carry some level of risk, but they also offer potential returns that justify that added exposure. For many clients, they’ve provided a good middle ground which is different from the traditional mix but not so unfamiliar that it feels uncomfortable. 

There are, of course, other alternative investments including private equity, hedge funds, real estate, commodities, but many of those require high minimum investments or long lock-up periods, making them impractical for the average investor.  

Structured notes, on the other hand, can often fit more seamlessly into a diversified portfolio. 

The Importance of Education 

Whenever we talk about alternatives, education becomes critical. These assets are often less liquid and less transparent than stocks or bonds. You can’t just pull up a ticker symbol and check their value every minute. That lack of visibility can be unsettling for some investors. 

I make it a point to walk clients through the basics of liquidity and risk tolerance before allocating anything to alternatives. I break down their assets into three timeframes: 

• Short-term dollars: money they’ll need within three years; essentially their emergency fund. 
• Mid-term dollars: funds they might need in roughly 4–15 years. 
• Long-term dollars: investments meant for 15 years or more. 

If someone might need the money soon, alternatives usually aren’t the right fit. They’re better suited for the long-term portions of a portfolio where liquidity isn’t as critical. 

Even after investing, I remind clients that the value they see on their statements might not fully reflect the true, real-time value of these holdings. Transparency in expectations is everything. 

How Much Is the Right Amount? 

Every client is different, but as a general rule, our firm caps alternative exposure at around 30% of a client’s total portfolio, depending on the product type and risk profile. 

In practice, though, most clients are well below that, often between 5% and 20%. 

For someone transitioning from a 60/40 portfolio, it might make sense to think of it as a 60/30/10 model with that 10% allocated to alternatives. In most cases, the alts portion would come from the bond side, since that’s where many investors have been feeling disappointed in recent years. 

The Bottom Line 

The 60/40 portfolio had an incredible run, and it may still play a role for many investors.  

But diversification today looks different than it did 20 years ago. The world has changed with interest rates, inflation, global politics, and market dynamics all more complex. 

Alternative investments aren’t a magic bullet, but they do offer another tool for building resilience into portfolios. The key is education, communication, and balance, ensuring clients understand what they own, why they own it, and how it fits into their long-term plan. 

In the end, that’s what good advising is all about: helping clients stay informed, confident, and positioned for the future even as the old models evolve. 

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^{-Opinions expressed are those of the author and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.} 

^{Investment advisory services offered through Raymond James Financial Services Advisors, Inc.. Signature Wealth Partners is not a registered broker/dealer and is independent of Raymond James Financial Services. Securities offered through Raymond James Financial Services, Inc., member FINRA / SIPC.} 

^{Alternative Investments involve substantial risks that may be greater than those associated with traditional investments and may be offered only to clients who meet specific suitability requirements, including minimum net worth tests. These risks include but are not limited to: limited or no liquidity, tax considerations, incentive fee structures, potentially speculative investment strategies, and different regulatory and reporting requirements. There is no assurance that any investment will meet its investment objectives or that substantial losses will be avoided.}