The 60/40 portfolio — 60% equities, 40% bonds — was the default answer to diversification for decades. It offered reasonable growth from equities with stability from bonds, and historically the two asset classes moved in opposite directions. When equities fell, bonds typically rose, cushioning the blow.
The period between 2020 and 2022 exposed a flaw in this model that had been building for years.
When the 60/40 Correlation Broke Down
In 2022, both equities and bonds fell sharply at the same time — driven by inflation and rising interest rates. The traditional negative correlation between the two asset classes broke down. Investors in classic 60/40 portfolios experienced losses in both the growth and defensive parts of their allocation simultaneously.
This wasn't unprecedented — it happened in the 1970s too — but many investors and advisers had grown up in a world where bonds provided reliable ballast. The 2022 experience was a reminder that diversification assumptions need periodic reassessment.
What Genuine Diversification Looks Like
True diversification means exposure to assets whose returns are genuinely uncorrelated — not just in normal markets, but during stress periods too. For a diversified modern portfolio, that typically means: global equities across multiple geographies and sectors; investment-grade and inflation-linked bonds; property and infrastructure; and optionally, commodities as an inflation hedge.
Geographic diversification matters too. UK-only equity investors are heavily concentrated in financials and energy. A global allocation provides exposure to technology, healthcare, and consumer sectors that are underrepresented in the FTSE.
Diversification Is Not the Same as Safety
Diversification manages risk — it doesn't eliminate it. A well-diversified portfolio will still fall in a broad market downturn. The goal is to reduce the severity of drawdowns, to avoid having all your eggs in one broken basket, and to improve risk-adjusted returns over the long run.
Diversification is the only free lunch in investing. But it only works if you're genuinely diversified — across geographies, sectors, and asset classes, not just fund names.
Wealth8's model portfolios are globally diversified across multiple asset classes. Our investment committee reviews allocations quarterly to ensure they reflect current market conditions and long-term objectives.
