It's time to rethink your portfolio strategy in this crazy new world

As Bob Dylan sang back in 1964, "the times they are a-changin'". 

Back then, investors were still coming to terms with a brave new post-war world, and a radical new approach to investing known as Modern Portfolio Theory, now better known as the 60/40 portfolio.

More than 60 years on, and like Dylan himself, the approach is showing its age. As equity markets evolve and bond markets become more reactionary, there's a growing sense that a 60/40 approach may no longer be the gold standard for portfolio construction. 

It's part of the reason we've seen renewed interest in the "permanent portfolio", which is designed to perform in any and all economic environments. 

Devised in the 1980s by analyst and Libertarian political candidate Harry Browne, it is also known as the "25/25/25/25 portfolio" for its quarter allocation to stocks, bonds, cash and gold. 

It certainly would have held investors in good stead over the last few years. According to analysis by Bank of America, it returned 23% in 2025 - its best single year since 1979 - and has delivered an average annual return of 8.7% over the last decade. 

BofA isn't the only institution revisiting the conventional wisdom on classic asset allocation. Early last year, Blackrock similarly called for an evolution to the 60/40 portfolio. 

As portfolio manager Michael Gates wrote back then, “The macro environment in early 2025 of higher rates, sky-high government deficits, and increased geopolitical uncertainty amidst stricter monetary policy and still above-average inflation creates a starkly more challenging environment for those classic 60/40 strategies to replicate the same historical success."

"An evolving world requires evolving strategies.”

Less than a year on, and that rings truer than ever. Record rallies in gold and silver are rewriting what’s possible in markets, even in the latter days of what has been an everything bull market since Covid.

In his article, Gates called for the addition of "liquid alts, gold and bitcoin" to the classic stocks and bonds portfolio. 

"The world is quickly changing," he wrote, "and yet investors’ need to achieve their desired financial outcomes remains. With the precedent drivers of performance fundamentally different today, we believe the success of yesterday’s 60/40 portfolio could be more challenging."

How things have changed

The growing recognition is that current market realities - and seismic changes to the macro landscape - mean we need to reassess classic portfolio construction from the bottom up, says Schroders' Head of Multi-Asset Sebastian Mullins. 

"If you think about the 60/40 portfolio, the idea there was you buy your equities, you buy your bonds, the bonds pay you next-to-nothing but diversify your equity risk," says Mullins. "It was dead money until it helped you."

"Right now, that fixed income component doesn't necessarily give you that much protection anymore, but it pays you income. If you want the income, it's great - it's not going to sell off as much as equities - but it's not going to rally necessarily in that structural context."

But this shift needs to be understood in the context of how markets have changed in recent years, and how radically different the economic landscape was following the GFC and through the Covid pandemic. 

"We had an environment of no inflation and central banks around the world not spending any money," said Mullins. "They were all licking their wounds from the GFC. Fiscal [stimulus] was turned off, inflation was gone, and the only way to boost the economy was to have central banks cut rates to zero and do QE."

"It was very much a liquidity-driven world. In that environment it felt like day-to-day there was lots of volatility, but there was no real volatility in equities. Markets just went up, the tide lifted all boats and you didn't need to do anything but buy US megacaps."

These days, the economic picture is a lot more complicated.

"It's like you bought that really good house 20 years ago, but it's in dire need of renovation."

He points to long-term infrastructure spending in Asia, specifically China, which has left the West needing to make up lost ground. 

"Bonds now have a real yield," says Mullins, "but they're not going to protect you." 

On the equities side, the rising tide is no longer lifting all boats, and investors may need to actively manage where they're allocating.

"60/40 isn't dead, but you have to be more active in how you make your allocations."

Rethinking allocations

While Mullins believes there's still merit to the classic 60/40 split, it now demands a much more hands-on approach.

On the bonds side of the ledger, it could mean avoiding the assets that aren't actually offering downside protection. 

"If most investors have a passive allocation to fixed income, they're going to have lots of long-dated US treasuries and lots of Japanese Government Bonds (JGBs). Do you want that? The answer is probably 'no'. That's not going to protect you."

"You want to be more active in the fixed income space - buying curve steepeners that can make money in that environment and can protect you from an equities sell-off."

It could also mean casting an even wider net on the defensive side, says Mullins, and considering products like floating rate credit, which potentially offers less duration risk but good income, or even gold. 

Ultimately, it's about striking the right balance between risk and reward across your portfolio, says Mullins, and that could mean moving away from a strict 60/40 split. 

"Do you want to have 60% [of your portfolio] in equities? Valuations are high and you have no protection in your portfolio."

"If you want to keep that structure, what do you have on the protection side? Are you trying to find areas of diversification like commodities or uncorrelated assets - whether that be hedge funds or CTAs (commodity trading advisers) - but something that can actually help with that correlation benefit."

The current market reality also makes the case for incorporating active management and a multi-asset approach into your portfolio, says Mullins. 

"You can, for example, have a more active asset allocation pool where you dial up allocation to Europe because of defence spending, then you pull it back to go into small caps in the US as manufacturing rebounds." 

"That's not for everyone, but we think being dynamic and being active is really important when you have this amount of volatility."

It's part of the thinking behind the Schroder Real Return Active ETF (ASX: GROW).

"Our ability to get in and out of assets when they're attractive and having that downside protection means it's a fairly good core in a balanced portfolio."

"You could have 50% in equities, 20% in GROW and then the rest in the fixed income assets you want. We can be the dynamic engine in someone's portfolio. We're seeing advisors move more towards that."

There's a similar case to be made on the income side, where something like the Schroder Absolute Return Income Active ETF (CBOE: PAYS) offers access to a wide spectrum of income products. 

"The breadth of opportunity there means it can deliver a cash-plus solution where investors don't want to necessarily take that duration risk as a static allocation. We're finding that's working really well in more defensive portfolios or part of that 40 in the 60/40 portfolio."

So if the 60/40 portfolio isn't dead, it's certainly in need of a refresh for investors wanting to get a handle on the new normal. 

"The more breadth you have, the more opportunities there are to deliver returns," says Mullins. "If you're just focusing on equities and bonds, you're missing a whole plethora of opportunities."