Is the 60/40 portfolio still relevant in 2026?

For a long time, equities provided long-term returns, while bonds delivered income and protection during periods of market stress. The strength of this model rested on a simple over-riding assumption: when one asset class struggled, the other would help offset the impact.

In recent years, that assumption has been regularly tested.

As advisers are no doubt aware, the traditional 60/40 portfolio became widely adopted during a period of relatively stable inflation and steadily declining interest rates, when bonds provided both income and diversification benefits.

In that setting, bonds played a dependable defensive role. When economic growth slowed or markets became volatile, interest rates typically fell, supporting bond prices and helping to stabilise portfolios. That relationship supported the idea that bonds could act as a reliable counterbalance to equities.

The events of 2022 and more recently with the outbreak of war in the middle east have been examples of how this assumption may be changing.

Both equities and bonds declined at the same time, with bond markets experiencing one of the most significant selloffs in decades as yields rose sharply in response to surging inflation and rapid policy tightening by central banks.

This challenged the long-held assumption that bonds would reliably protect portfolios during periods of market stress.

The end of an equity cycle

Today, geopolitical tensions shape economic conditions, inflation remains persistent, and the RBA has raised rates three times, with more possible. Bonds now react sharply to interest-rate changes, causing volatility instead of stability.

At the same time, equity markets have become more concentrated, with a small group of large technology companies, often referred to as the Magnificent Seven, driving around a third of returns in the US and the Australia equity market heavily influenced by banks and resource companies. This has created a growing concern around diversity of equity market returns.

Artificial intelligence is another key driver of this dynamic, reshaping expectations about growth and productivity, contributing to both opportunity and uncertainty in markets.

AI has been called a ‘macro variable’ and is expected to drive a multi‑trillion‑dollar investment cycle, with most spending still ahead. This surge will likely concentrate earnings growth and market leadership among a small group of companies positioned to build and supply AI infrastructure.

These developments have led some to question whether we are approaching the peak of a traditional equity cycle, and what that might mean for portfolio stability.

Rethinking defensive assets

If equity markets become more volatile or less predictable, the role of defensive assets becomes even more important, but also more complex.

Diversification is central to portfolio construction, but it works only when assets behave differently. In high inflation, equities and bonds can both react negatively to the same pressures. This weakens diversification’s protective benefits and makes portfolio outcomes less predictable.

Income has always been a central objective of defensive allocations, particularly for investors approaching retirement or relying on their portfolios for regular cash flow. However, the focus should not necessarily remain on maximising yield, but on maintaining reliability. Higher yields can be attractive, but they typically come with higher risk.

This shift calls for a more deliberate approach to income generation. Rather than relying solely on traditional bonds, advisers may look to consider a broader range of income-producing assets that can deliver stability across different market conditions. This may mean identifying other sources of return, as maintaining stability may require a broader mix of defensive exposures than in the past.

Appropriate private credit

One area attracting increasing attention is high-quality private credit, particularly in segments of the market with solid repayment histories, strong managers and well-defined risk management.

Appropriately managed, income-producing private credit can provide a consistent source of income while helping to reduce capital volatility that is sensitive to interest-rate movements, with structures typically designed to generate regular cash flow.

Australia’s securitised credit markets, including residential and commercial mortgage-backed securities, provide a clear example of how well-managed private credit can support portfolio stability. These markets have maintained a strong record of repayment performance over time, reinforcing their role as a dependable source of income within diversified portfolios.

When carefully selected and appropriately managed, private credit, offering varying levels of liquidity, can play an important role in strengthening defensive allocations. The objective is not to replace traditional defensive assets, but to complement them by adding additional sources of reliable income and improving overall portfolio resilience.

The traditional 60/40 model is unlikely to disappear entirely, but the environment around it has changed. The goal is still to build portfolios that can support investors through different conditions, but what is evolving is the way advisers deliver stability along the way.