What's Wrong With The 60/40 Portfolio?
The Accidental Death of Diversification — And a Smarter Alternative
For decades, diversification felt straightforward: stocks for growth, bond funds for stability, and the assumption that the two would balance each other out when markets became volatile.
A recent article from Hartford Funds challenges that assumption—and makes the case that diversification hasn’t disappeared so much as it has quietly stopped working the way investors expect.
(For most investors, this discussion applies to bond funds and bond ETFs, rather than individual bonds held to maturity.)
A quick summary of the article
The article argues that traditional diversification has weakened almost by accident.
Two major shifts are driving the problem:
- Equity markets are increasingly concentrated, with a small group of mega-cap stocks accounting for a disproportionate share of returns.
- Bond funds have become less reliable as diversifiers, particularly during inflationary or rising-rate environments when stocks and bond funds can decline at the same time.
The result is that many portfolios labeled “diversified” are actually far more dependent on the same economic forces than investors realize. Liquidity is still present—but diversification, the thing meant to reduce risk when markets struggle, often isn’t.
Where bond funds fall short today
Bond funds still play an important role in portfolios, especially for liquidity and income. But their traditional job was larger than that. They were expected to:
- Hold value during equity downturns
- Offset stock market volatility
- Provide stability during periods of market stress
Recent market cycles have shown that bond funds don’t always deliver those benefits—particularly when inflation, interest rates, and equity valuations move together. Because bond funds are marked to market and have no maturity date, losses can persist rather than resolve over time.
That creates a planning challenge:
If bond funds no longer reliably diversify risk, what should replace part of that role?
How Fixed Indexed Annuities change the equation
Fixed Indexed Annuities (FIAs) aren’t a replacement for bond funds in the traditional sense. But for some investors, replacing a portion of bond fund exposure with an FIA can improve diversification because FIAs are built differently.
- No market pricing risk
FIAs are not marked to market. Account values do not decline due to market losses. - Structural diversification, not historical correlation
Bond funds rely on how markets behave. FIAs rely on how contracts are designed. - Growth without equity ownership
FIAs can participate in market-linked growth without owning stocks directly, reducing exposure to equity concentration risk.
A quick note on FIA fees
Most FIAs don’t have direct, ongoing investment fees. Instead of charging an explicit fee, the insurer builds its cost into the index crediting terms. That’s the trade-off—less upside in exchange for protection and predictability.
The result is that any growth credited to the annuity remains yours. Your account value is guaranteed not to be reduced by fees or poor market performance, which is one reason an FIA can be an effective diversification tool.
Diversification beyond downside protection
A common misconception is that the diversification benefit of an FIA comes only from its floor against losses. In reality, many FIA strategies are designed to diversify return sources as well.
Some FIA indexes incorporate exposure beyond traditional equities, blending elements such as cash, volatility controls, or commodities alongside stocks. These designs aim to reduce reliance on any single market driver and, in certain environments, can create growth potential even when both stock and bond fund markets are under pressure.
This means diversification isn’t just about avoiding losses—it’s about reducing dependence on the same forces that often impact traditional portfolios at the same time.
The takeaway
Diversification hasn’t disappeared—but it has changed.
If bond funds no longer provide the protection they once did, investors may need to look beyond traditional allocations. For the right investor, a thoughtfully structured Fixed Indexed Annuity can serve as a more reliable diversifier than bond funds alone—offering stability, flexibility, and growth potential designed for environments where traditional diversification struggles.
The goal isn’t complexity.
It’s building portfolios that hold up when markets don’t behave the way they’re supposed to.
Ready to take the next step?
If you’re wondering whether your portfolio is truly diversified—or simply diversified by label—it may be worth a deeper look.
My job isn’t to convince you of any specific solution.
My job is to help you clearly define the problem. If we can do that, the right solutions tend to become obvious.
If you’d like a second set of eyes on how your portfolio is structured—and how it might behave when markets don’t cooperate—I’d be happy to help.
