BlackRock believes the 60/40 era is over. How should investors mitigate risks now?

For decades, the traditional core portfolio, where about 60% are stocks and 40% are bonds, was considered a universal model of diversification: a fall in the stock market was compensated by the growth of debt securities. But BlackRock strategists believe that this scheme no longer works.

According to the assessment of investment company analysts, this is not a temporary phenomenon, but a structural shift. Inflation remains stubbornly high, central banks are keeping rates at tight levels for longer, and the debt burden of states is increasing the vulnerability of markets. Meanwhile, the rise of US indices is increasingly dependent on a small group of technology companies. Collectively, this is a game changer: old diversification principles are losing effectiveness, and investors have to find new sources of income and protection.

The classic balanced investment strategy, in which 60% of assets are stocks and 40% are bonds, is based on the fact that stocks and bonds move in opposite directions. If the stock market falls because of declining corporate earnings or poor forecasts, investors can protect themselves through rising prices of debt securities. This relationship has been the foundation of diversification for decades.

Today, the situation is different, BlackRock strategists say: "Less reliable correlations undermine the diversification benefits that stocks and bonds provided to each other. Unlike previous short-term spikes, the current coincidence of their dynamics reflects deeper structural forces - persistent inflation, monetary authority actions, and fiscal imbalances. All of this suggests that the new regime could persist and radically alter the risk profile of portfolios."

Adding to the "broken insurance" is another vulnerability: the structure of the stock market. In 2025, about 30% of the S&P 500 index capitalization is accounted for by just seven of the largest technology companies related to artificial intelligence. They pull quotes upward, but make the market less balanced: any deterioration in a narrow group of leaders at the same time as a correction in the debt market can collapse the shares. Together, this increases the volatility of portfolios and makes traditional protection mechanisms less effective.

BlackRock notes that in the new regime, investors are more actively reassembling their investment structure. If before the pandemic, equities started to take the lead - in the ratio of 70 to 30, today almost half of the surveyed BlackRock clients diversify their portfolios through alternative instruments: liquid hedge strategies, commodities, especially gold, and digital assets.

The tendency to revise portfolios is also evident in the movement of funds between funds. Since November 2024, investors have withdrawn more than $5 billion from long-term U.S. Treasury bond ETFs, while short-term paper funds have received about $69 billion. This gap shows that investors are more actively managing duration - that is, choosing how sensitive their debt portfolio will be to changes in rates.

"Investors are moving beyond traditional bonds and looking for strategies that combine income, risk management and growth potential," says Robert Fisher, senior portfolio manager at BlackRock.

BlackRock believes the Fed may start cutting rates as early as this fall. This usually supports bonds, but long issues are particularly vulnerable in the current environment: their prices depend on inflation and budget expectations. Once the forecasts change, the value of such securities quickly goes down.

Therefore, strategists are emphasizing medium-term bonds: "We continue to have the highest yield preference as we see attractive total returns with low interest rate risks. For these yields, we favor bonds with maturities of 3 to 7 years, which are in the 'middle' of the yield curve," BlackRock said in a review.

Another uncertainty factor is inflation. In order to maintain real portfolio returns even when prices rise, BlackRock recommends short-term inflation-linked bonds (TIPS). These securities allow you to earn a coupon while protecting your capital from depreciation.

BlackRock maintains a positive outlook on growth stocks, primarily artificial intelligence companies. But even Magnificent 7, whose total return since the beginning of the year amounted to 11%, has a mixed picture: the gap between the best and worst issuers reached 50%. According to BlackRock analysts, this signals a new stage in the AI theme: investors no longer bet on all seven at once, but act selectively.

According to BlackRock analysts, this adds value to an active approach: 'Market leadership is changing, even at the top, as investors question outdated business models. Simply betting on an index is no longer effective, so the focus is shifting to the quality of companies - debt levels, cash flow stability and ability to sustain earnings.

Fundamental forecasts remain strong, with McKinsey estimating that about $5.2 trillion could be invested in AI data centers alone through 2030, supporting long-term revenue growth for companies in the technology and communications segment.

At the same time, BlackRock also draws attention to the financial sector. Banks and investment companies benefited from the normalization of the yield curve and revival of investment banking activity. Following the results of the second quarter, many players in this segment reported profit growth above expectations, which makes the sector attractive for investors.

BlackRock records a noticeable increase in interest in foreign markets. Since the beginning of 2025, 29% of new equity investments have come from international funds, while a year earlier this figure was only 12%. This shift can be explained by two key factors.

The first is a possible transition of the dollar into a weakening phase. Analysts refer to historical data: the currency market moves in stable, long-term cycles, the average duration of which was about eight years. Since 1971, there have been six complete "dollar cycles," when the U.S. currency first strengthened and then weakened. A weakening dollar has traditionally boosted returns on foreign assets for global investors.

The second factor is a desire to reduce the over-concentration of U.S. equities. Today, an average of 77.5% of advisors' portfolios are in the U.S. market, compared to 70% in 2018. That said, BlackRock notes: foreign stocks have historically performed better as insurance than U.S. small companies, especially during periods of decline in the S&P 500 Index.

It's not just "going outside" the U.S. that matters, but specific countries and areas. "We believe that an equity investment in a single country, such as Japan, represents an excellent tactical investment opportunity, backed by accelerating wage growth, significant improvements in corporate governance and a favorable currency. In Europe, fundamental, long-term trends and loosening regulation have supported the financial sector, as well as aerospace and defense," BlackRock strategists wrote.

BlackRock analysts note that the interest in digital assets in the market remains, despite their high volatility. In recent years, investors have been actively using exchange-traded products (ETPs) backed by physical assets to include bitcoin and other cryptocurrencies in portfolios.

According to strategists, cryptocurrencies are risky assets due to their high volatility and cannot serve as a "safe haven". But their peculiarity - independence from inflation and interest rates, as well as their own supply and demand factors - makes them a valuable tool for diversification. Bitcoin has a special place here: it can become a unique source of income that does not depend on the dynamics of stocks and bonds

At the same time, BlackRock analysts emphasize that the share of cryptocurrencies in the portfolio should remain limited, and the selected instruments should be as liquid as possible. Only in this format are digital assets able to actually reduce portfolio risks, rather than increase them.

The key to portfolio stability today, according to BlackRock analysts, is to replace the usual "passive diversification" with a more active configuration of assets: in order to reduce risks and maintain the potential for returns, investors need to rely not only on stocks and bonds, but also to add non-traditional asset classes.

This article was AI-translated and verified by a human editor