A shifting market regime

For decades, the traditional 60/40 portfolio embodied simplicity with two contributing pillars: equities (60% of the portfolio) as the primary driver of long-term growth and high-quality bonds (40% of the portfolio) as the defensive contributor that dampened losses when risk assets sold off. That second pillar worked particularly well in the 2000–2020 period, when equity and government bond returns were often negatively correlated.

The environment in which the 60/40 portfolio emerged as a reference allocation was built on relatively stable foundations: disinflation, predictable monetary policy, and expanding global trade supported balanced relationships between asset classes. Within this framework, equities and bonds tended to play complementary roles, allowing diversification to absorb market shocks.

That backdrop has gradually evolved. Since 2020, global 60/40 portfolios have suffered some of their worst drawdowns. Markets today are increasingly exposed to global and interconnected shocks, often driven by geopolitical tensions, energy security concerns, and supply‑chain dynamics. These forces can influence growth, inflation, and financial conditions simultaneously, making asset‑class reactions more synchronised than in the past.

At the same time, the policy landscape has become more complex. More volatile inflation and a closer interaction between monetary and fiscal policy have weakened some of the historical stabilisation mechanisms, particularly the traditional defensive role of bonds. Meanwhile, market leadership has become more concentrated, increasing the risk that portfolios may appear diversified while remaining exposed to common underlying drivers.

These developments do not undermine the core principles of asset allocation. They do, however, highlight that the economic and financial regime has shifted.

When diversification behaves differently

This regime shift helps explain why 60/40 diversification has been less reliable in recent stress episodes, as shocks are increasingly systemic in a more fragmented and volatile world.

Common forces—such as inflation uncertainty, fiscal constraints, and geopolitics—can move multiple asset classes at once, causing equities and bonds to react in tandem and weakening diversification when it is needed most.

In short, correlations can rise sharply at precisely the wrong time, challenging assumptions of stable cross-asset diversification.

For portfolio construction, these changing dynamics reinforce a central message—diversification is less about owning two broad asset classes and more about deliberately combining multiple, differentiated return drivers with explicit attention to risk profiles, correlation behaviour and liquidity under stress.

Investors can pull several levers to achieve these objectives, with active management at the core. As markets have narrowed and become driven by AI-led tech exuberance, concentration risks at a stock and theme/sector level have become elevated. Research-led active management can help mitigate risks from the bottom-up.

What this means in practice is that equity allocations might move away from index-led, market cap-weighted allocations, which are dominated by the US, towards more evenly spread exposures across several other regions such as Europe or emerging markets. It can also mean shifting style factor exposures away from growth-dominated indices to spread more evenly across quality or value assets.

While this can provide portfolios with a more solid base for stability and returns, other levers can also add further resilience. Bonds remain a core component of a rebalanced portfolio, especially as higher yields have boosted their ability to deliver real income. However, they should no longer be the only defensive allocation; adding income-focused solutions in other asset classes such as equities can also provide compelling risk-adjusted return benefits.

Active ETFs can provide a nimble edge

A rapidly changing macroeconomic and geopolitical environment can require allocations to shift rapidly. ETFs can facilitate such shifts and provide investors with a nimble means of acquiring or exiting market access through building block solutions.

A building block approach can also help investors express the broader shifts required of modern portfolios: more intentional regional diversification in equities, a more diversified income toolkit within fixed income, or climate-aware tilts, for example.

Fidelity’s research-driven ETFs can act as core portfolio building blocks that target specific outcomes across a wide range of markets and asset classes, providing investors with the benefits of traditional funds in the efficient ETF wrapper. They are a cost-effective, flexible, and transparent means of integrating proprietary Fidelity research insights into investment portfolios.

Important Information

Fidelity International refers to the group of companies which form the global investment management organisation that provides information on products and services in designated jurisdictions outside of United States of America. Unless otherwise stated, all views expressed are those of Fidelity International. Views expressed may no longer be current. Fidelity, Fidelity International, the Fidelity International logo and F symbol are registered trademarks of FIL Limited.

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Contact:

Fidelity International

Solène Garnavault

Solene.Garnavault@fil.com