Asset allocation is the Holy Grail for investors. Indeed, good asset allocation translates into good portfolio performance. After the underperformance of so-called traditional asset allocations, welcome to a New World.
The facts
For decades, the 60/40 portfolio – 60% equities and 40% bonds – has been the cornerstone of the investment strategy, balancing growth and stability. However, its effectiveness has been called into question since the COVID-19 pandemic, particularly after the collapse of equities and bonds in 2022, which was one of the worst years for this strategy in half a century. Despite this setback, historical data suggests that 60/40 produced solid returns over time in the decade leading up to the pandemic.
Investors must now decide whether the 60/40 strategy is still relevant or whether adjustments, such as a 70/30 or 50/50 split, are necessary to deal with changing market conditions. Some analysts recommend a more flexible approach, incorporating alternative assets such as commodities, property or even crypto-currencies to diversify beyond traditional equities and bonds. In short, if you thought that asset allocation was just a ‘recycling’ of old methods, new trends are emerging that could revolutionise the next few years.
What are the latest investment styles?
As you know, there are hundreds of investment styles. However, we can summarise the most “popular” investment styles of recent decades.
- The Foundations style (1930s-1980s): There was a time when investing was a simple matter: bonds reigned supreme. At a time of high interest rates and relatively contained inflation, portfolios were heavily allocated to sovereign debt, guaranteeing predictable returns and limited volatility. The objective? To preserve capital and ensure a regular income. No need for diversification, no unnecessary complexity, just pure bond yield. But this model had one flaw: it relied entirely on a stable macroeconomic environment. With the arrival of the 1980s and the Volcker turning point in the United States, the situation changed. Rising interest rates undermined portfolios with too much exposure to bonds, paving the way for an era in which equities would take centre stage.
- The age of 60/40 (1980s-2000s): The revolution of the 80s was the sacrosanct 60/40 portfolio – a near-perfect balance of equities and bonds, offering solid returns with moderate risk. It was a time of triumphant capitalism, the financial Big Bang and the democratisation of equity markets. With central banks becoming more predictable, interest rates falling and inflation under control, equities became an essential part of performance. The result: a boom in stock market indices and the rise of large institutional investors. But a structural problem was emerging and the model was soon to show its limitations in the face of a changing financial environment. Could we still be satisfied with such a rigid portfolio in the face of crises and new market dynamics?
- The Barbell portfolio (2001-2020): The turn of the century saw the rise of the “barbell” portfolio, a far more sophisticated approach based on a combination of ultra-dynamic assets and safe havens. The 60/40 model was running out of steam and interest rates, already falling, were crushed by post-2008 monetary policies, making traditional bonds less attractive. Investors had to adapt. On the one hand, passive strategies (ETFs, indices), simple and inexpensive. On the other, active management and alternative assets – hedge funds, private equity – in search of performance. The idea was simple: protect yourself while capturing growth. But with interest rates close to zero and ultra-interventionist central banks, this model has also shown its limits. It was time to rethink asset allocation yet again.
Welcome to 3D!
Today, everything has changed. Gone are the days when you could rely on a traditional portfolio. Bonds? Too volatile. Equities? Less readable.
Investors are now turning to more complex solutions tailored to an uncertain world. The focus is on private debt, alternatives and hybrid strategies. Private credit is becoming a key alternative to traditional bonds. Alternative investments – private equity, infrastructure, hedge funds – offer returns uncorrelated with traditional markets. Above all, the distinction between equities and bonds is disappearing in favour of genuine multi-asset strategies. What does this mean?
Traditional diversification is dead, long live diversification 2.0! This is what we call 3D: Diversification, Diversification and … Diversification. Today, it’s a question of flexibility, innovation and precise selection of assets. The market rewards those who know how to anticipate major trends and adapt quickly. In other words, active management should be in the limelight in 2025, whereas in 2024 it was ‘enough’ to invest in the Nasdaq or, even better, Nvidia!
How did these portfolios perform?
Estimates of the performance of ‘traditional’ portfolios in recent years are given below:
- 60/40 portfolio: simulated with an average annual return of around 7% and moderate volatility (12%). This portfolio represents a traditional balanced allocation of 60% equities and 40% bonds.
- Barbell portfolio: simulated with an average annual return of around 6% and lower volatility (10%). This strategy balances high-risk and low-risk assets, aiming for stability.
- Replacement portfolio: simulated with an average annual return of around 8% and higher volatility (14%). This portfolio probably includes alternative investments or riskier assets.
- Foundations portfolio: Simulated with the highest average annual return (around 9%) but also the highest volatility (15%). This portfolio can focus on growth-oriented assets such as equities, emerging markets or hedge funds.
Conclusion
Asset allocation has undergone a major evolution over the decades, moving from the 60/40 model to more dynamic strategies such as Barbell and alternative investments. In an environment where bonds are becoming too volatile and equities less readable, investors are having to adapt by integrating hybrid and multi-asset strategies. Traditional diversification is dead, giving way to a more flexible and selective approach, where active management becomes essential to capture performance. In 2025, innovation, flexibility and the ability to anticipate will be the keys to success in a world where mere exposure to the Nasdaq will no longer suffice. Welcome to the era of 3D!
