The 60/40 equity-bond model of diversification has been around for many years, but many had already been questioning its relevance before the Covid-19 pandemic struck.
As such, Trustnet asked several investment experts whether it should be consigned to the history books?
The model has struggled to remain relevant in recent years in the era of loose monetary policy and low interest rates that followed the global financial crisis and saw all asset prices rise.
And further rounds of quantitative easing and interest rate cuts as the coronavirus took hold has seen markets continue to power ahead following the March sell-off.
Indeed, Hermione Davis – investment director at Ruffer – recently questioned whether the traditional diversified portfolio would offer much protection in any future market downturns given that abundant liquidity had buoyed all assets.
She said conventional bonds were unlikely to provide either acceptable returns in good times nor offer much protection during a downturn.
“This will be a shocking contrast to the last 40 years,” said Davis. “Interest and inflation rates have been falling steadily since 1981. The result has been that an investor combining equities and bonds has received excellent returns from both.
“Better still, when the equities fell, the automatic response of central banks has been to cut interest rates. This conveniently boosted the bonds just when the equities were suffering.
“The result was that the risk-adjusted returns – the returns adjusted for sleepless nights – from a traditional portfolio containing both assets was particularly attractive.”
Performance of 60/40 portfolio vs constituents over 10yrs
Source: FE Analytics
Now, however, with yields already having fallen so low it remains difficult to see what would push bond prices higher. And this is now starting to cause problems for the 60/40 model. 
“For over 30 years there’s been a lovely negative correlation – or counterbalance – between stocks and bonds,” said Rob Perrone (pictured), investment counsellor at Orbis Investments. “But for bonds to go up when stocks go down, yields have to be able to fall.
“That’s why we’re scared about 60/40.”
Perrone said the high valuations in equity markets currently mean that there would be little protection from holding bonds should there be a correction.
Nevertheless, Andrew Pease, global head of investment strategy at Russell Investments, said even though many have written it off, the traditional 60/40 asset mix has been “amazingly resilient”.
However, it now faces new challenges that it might not be able to overcome, particularly as there are now many alternative assets readily available to investors.
He said: “One thing which is at the top of everyone’s minds is what do we use for defensive hedges given that bond yields are so low.”
Indeed, investors might have to look to other assets to provide the income and returns previously provided by bonds, according to Pease.
“There’s no easy answer, nothing’s ever going to give you the same sort of defensiveness of bonds have in that 60/40 portfolio,” he continued. “I just think that you need to look for broad sources of return and have a really strong dynamic framework built over the top of it that allows you to adjust for market conditions.”
Julian Chillingworth (pictured), chief investment officer at Rathbones, said he prefers to think of asset allocation in terms of liquidity and equity-type risk. 
“In reality, I would say that life has moved on considerably from [60/40] anyway,” he said. “If you were planning for a medium-risk client, you might have roughly 60 per cent in equities – which would be a mixture of UK and international equities so that you’re diversifying risk to a degree across currencies as well for a UK-based sterling investor.
“Then we divide it not by bonds and equities in the simple sense, but by liquidity, equity-type risk and diversifiers.”
Liquidity assets would include government securities, high-quality AAA-rated bonds and cash, said Chillingworth, while equity-type risk would be invested in investment-grade corporate bonds and emerging market debt. And in diversifiers, Chillingworth would invest in infrastructure funds and hedge funds.
Van Luu, global head of currency at Russell Investments, said although bonds remain a core liquid asset and are one of the few assets that can effectively hedge deflation risk, investors should consider diversifying their exposure with other assets.
Cash could be an effective, albeit unattractive bond alternative, said Luu. Gold too could play a role given its liquid profile and inflation hedging properties, but it does not produce an income and market value is often driven by sentiment.
TIPs – Treasury Inflation-Protected Securities – could give investors inflation protection in a portfolio and an income, according to Luu, while defensive currencies – such as Japanese yen – could act as a safe haven when risk assets fall.
Investors may also benefit from diversifying their equity risk, said Orbis Investments’ Perrone.
He said: “Investors aren’t crazy to think that equities offer better returns, we agree with that. But you want to be active with your equity selection.
“So, rather than just accepting broad exposure, which has become concentrated, you want to pick stock by stock.”
Perrone said investors should concentrate on finding the stocks they believe are undervalued and hedging out some of the market risk to capture the alpha.