Can Australian investors rely on the 60/40 portfolio any more?

Is the 60/40 investment principle still an effective way to structure a portfolio? It’s a question we keep getting asked, especially since 2022, when share prices and bond yields fell simultaneously.

But we think the more useful question isn’t whether 60/40 is “dead”; it’s what problem the 60/40 principle was designed to solve and whether that’s the same problem Australian investors face in 2026. And, to answer that, it helps to step back from the numbers and look at the principle itself: what it is, what it was intended to achieve and where its assumptions still (or no longer) hold up.

What the 60/40 portfolio actually is (And what it isn’t)

The 60/40 principle is a simple formula for constructing a portfolio that says you should have 60 per cent of your total investment in shares and 40 per cent in fixed income. This, proponents argue, is the best formula for balancing competing objectives within a single portfolio: long-term growth, stability, income and risk control.

The logic is straightforward. Shares have historically provided the strongest long-term returns, but they are volatile and can deliver uneven returns. Fixed income, by contrast, tends to offer lower long-term growth but provide greater stability and more reliable cash flow. By combining the two – and periodically rebalancing to prevent the portfolio drifting too far in either direction – investors give themselves the best chance of smoothing returns over time without sacrificing growth.

So the 60/40 principle may be best understood as a risk-management framework, not a promise of returns or a rigid rule.

It was never designed to maximise performance in a given year, nor for constant adjustment in response to short-term market moves. Instead, it’s a long-term approach that relies on discipline through market cycles rather than timing.

Arguments for moving beyond a traditional 60/40 portfolio in 2026

Despite this, some commentators now believe the 60/40 principle has had its day, particularly for Australian investors. Here are some of the reasons why.

1. Fixed income and shares have been acting in unison

The traditional 60/40 portfolio relies on the assumption that fixed income behaves differently to shares. When equity markets fall, bonds are expected to provide stability and offset some of the damage.

That relationship held for long stretches of post-war history, particularly in the United States, as the table below illustrates.

US shares vs US 10-Year bonds in years of worst negative stock market growth  (1950-2008)

*Source: NY University, Stern Business School

More recently, however, this relationship has proved less reliable. During the 2022 market correction, both US shares and US government bonds declined sharply, with the S&P 500 falling by 18.04 per cent and US 10-year bonds down 17.83 per cent.

This happened because the 60/40 framework was designed to protect against economic slowdowns, when falling growth tends to hurt equities but benefits bonds through lower interest rates. In 2022, however, the dominant risk was inflation, not recession. Rising prices and aggressive rate hikes put pressure on share prices at the same time as they drove bond prices lower.

In an environment where inflation remains a risk and interest rates are once again rising, investors can’t assume fixed income will always offset the volatility of equity markets.

Read more about why Australian investors should be paying attention to US bond markets

2. In 2026, shares carry high valuation risk

When investors talk about share market risk, they usually think about the possibility of a sharp correction. But there’s another, less understood risk that often matters just as much, especially for investors nearing retirement. That’s valuation risk – or the risk you’re paying too much for a company’s stock today based on the prospect of future growth.

Valuation risk becomes particularly important for retirees and pre-retirees. When income is being drawn from a portfolio, markets don’t just need to recover eventually, they also need to behave reasonably along the way. High starting valuations reduce the margin for error and make portfolios more vulnerable to sequencing risk.

Many believe valuation risk is alive and well in 2026. For instance, the All Ordinaries Index – which measures the total value of Australian shares – has a price-to-earnings (P/E) ratio of just over 22, compared with its long-term average of close to 17.

Meanwhile, parts of the US market – especially large tech stocks – are priced at multiples well above historical norms. For instance, the world’s largest company by market cap, NVIDIA, is currently trading at a price-to-earning ratio of almost 50.

High valuations don’t predict an imminent market fall, but they do suggest future returns may be lower and more sensitive to adverse news than investors have become accustomed to. That potentially weakens one of the traditional assumptions underpinning the 60/40 model: that equities will reliably do the heavy lifting when it comes to capital growth.

3. Australian investors are already too concentrated (and not just on paper)

The 60/40 model was developed in a context where most investors held the majority of their wealth inside financial portfolios. That assumption doesn’t hold for many Australian households in 2026.

For most Australians, the family home is the largest asset and many also own an investment property. As a result, a substantial share of personal wealth is tied to the domestic housing market. Super doesn’t necessarily offset this exposure, as our retirement savings tend to be heavily invested in Australian shares – a market dominated by banks whose earnings are closely linked to residential property and household borrowing.

There is also currency concentration. Wages, super balances, property values and retirement spending are all denominated in Australian dollars, leaving few natural offsets if the local economy slows, the currency weakens or domestic markets underperform.

By contrast, the 60/40 framework was developed in the United States, where equity markets are broader, bond markets deeper and retirement wealth is more cleanly contained within financial portfolios rather than spread across property and other assets.

This difference matters. The traditional 60/40 model was designed to manage financial-market risk inside a single portfolio. However, for many Australian investors in 2026, the challenge is managing two types of risk:

• concentration risk, or having too much wealth exposed to the same assets or economic drivers, and
• sequencing risk, or the chance that poor returns early in retirement, when you’re withdrawing money, will have a lasting impact even if markets recover later.

In other words, the 60/40 model was built to solve different problems, in a different system, at a different time.

Arguments for still respecting the 60/40 principle in 2026

And yet, for all its faults in the context of contemporary Australia, here’s why we think the 60/40 principle still has a lot going for it.

1. The core logic of the 60/40 principle remains sound

In essence, the 60/40 principle isn’t about any single number, despite its name. It’s about balancing growth and risk across market cycles: shares for long-term return and fixed income as a stabiliser that provides income, liquidity and capital preservation.

That logic still holds in 2026. Investors continue to need both return and protection, particularly in an environment of longer retirements and more volatile markets. What has changed is not the principle itself, but the conditions in which it’s applied.

2. Fixed income does more than one job

There is still a strong case for meaningful exposure to fixed income in a diversified portfolio. The mistake is treating it as a single, undifferentiated allocation.

After all, there are different types of fixed income which serve different purposes.

• Short-dated, high-quality investments (such as bonds maturing within 12 months) are typically used to preserve capital and provide liquidity for spending or rebalancing.
• Longer-term government bonds tend to be more sensitive to interest rates and can offer protection during economic slowdowns.
• Credit and income-focused investments (such as corporate bonds and higher-yield debt) can deliver higher cash flow, but are more exposed to economic growth conditions.
• Term-based and structured investments often prioritise regular income and capital stability, and are less impacted by day-to-day price movements.

Understanding these distinctions matters. Fixed income does more than simply counter the volatility that comes through investing in shares. Portfolios that allocate a substantial portion of capital to fixed income, while recognising its different roles are more likely to hold up across changing market conditions

3. Long-term discipline almost always beats short-term optimisation

Periods of market uncertainty often prompt investors to search for the “perfect” portfolio mix. In practice, outcomes are shaped less by fine-tuning specific allocations and more by whether investors can remain disciplined through market cycles.

Simple, well-understood frameworks tend to work not because they’re optimal in every environment, but because they help investors avoid costly behavioural mistakes. Over the long-term, this discipline is often more valuable than constantly tinkering with your portfolio design.

Smart alternatives to the 60/40 portfolio for Australian investors

For Australian investors, moving beyond a rigid 60/40 split doesn’t require abandoning the principles behind it. It simply means applying them more thoughtfully to today’s conditions.

The starting point should be to look beyond a single portfolio and consider your entire balance sheet, including super, property, cash and investments. Asset allocation decisions only really make sense when all of your assets and exposures are viewed together, rather than in isolation.

Another approach is to stop thinking in terms of shares vs fixed income, and to diversify by function rather than asset label. After all, even within those two categories, different investments respond differently to factors such as inflation, interest rates and economic growth. So, thinking in terms of stability, liquidity, capital preservation and growth can be more useful than relying on broad categories alone.

Finally, flexibility matters. Asset allocation doesn’t need to remain static for decades. As valuations change, income needs evolve and retirement approaches. Instead of asking “what percentage should be in fixed income”, ask yourself questions like: Do I have 12 months’ spending in short-term stability? Do I have protection against unexpected inflation? Do I have exposure to assets that benefit from deflation?

The answer may lead you to very different allocations than a rigid 60/40 split.

Our take on the 60/40 portfolio: Retire the rule, not the principle

The 60/40 portfolio has endured because it addressed a real problem: how to balance growth, income and risk through market cycles. That problem hasn’t disappeared.

What has changed is the environment in which Australian investors operate. Longer retirements, different inflation dynamics and more complex balance sheets mean that a static, one-size-fits-all allocation is no longer enough for many of us.

In this context, the mistake isn’t using the 60/40 framework, it’s using it without understanding why it existed in the first place. And treating it as a rule to follow, rather than a principle to apply, risks oversimplifying decisions that require much more nuanced analysis.

That said, retiring the rule doesn’t mean abandoning discipline. It means focusing on the roles different assets play, how they interact across conditions, and how they support your long-term objectives.

This can be framed by answering three short questions:

1. What does your total balance sheet look like today, including property, super and any other assets you hold?
2. Which economic scenarios would cause you genuine hardship?
3. What role does each investment on your balance sheet play in protecting against those scenarios?

The answers you give will matter more than any percentage split.