It was only a few short years ago that many were writing obituaries for the 60/40 portfolio. Inflation was popping off, both bonds and equities were falling, and many headlines declared the common balanced approach “dead.”
Fast forward to today, and those headlines have not aged well. Balanced portfolios are not only alive but thriving. In fact, the Canadian balanced category is now posting the strongest three-year rolling return in more than 25 years. For investors who stuck through the turbulence, patience has paid off. For those who were convinced the world changed, does that same logic lead you to believe it changed back?
The irony is that the very thing that caused investors to consider abandoning the 60/40, correlation, is also what revived it. It’s a rare occurrence that over three years, all four major equity geographies are up more than 20% annualized at the exact same time. This isn’t even considering gold, bonds (better than you think), and a decent yield from cash. For multi-asset investors, it’s been an almost perfect environment. But while perfection is hard to come by, as seen below, it rarely lasts either.
When everything works at once, it’s natural to feel both comfort and discomfort at the same time. While that’s a good problem to have, it does present its own challenges for portfolio managers.
The discomfort obviously comes from feeling like there’s little place to add value to the portfolio. There are very few bargains and no clear pain points to fix. You don’t want to sell equities for cash and derisk if this is going to continue, but you also don’t want to buy into strength at new highs. It’s a difficult paradox: too good to ignore, yet too perfect to trust. This is what we’re calling the correlation coma.
Broad-based gains like these are typically seen coming out of a recession, when assets are rebounding from deep discounts and policy support is plentiful. This time, however, the alignment is happening near cycle highs, with valuations stretched in many areas. The U.S. market trades around 22-23x forward earnings, and international markets have also re-rated higher. It’s difficult to see a signal for a downturn ahead, but prices do suggest that perhaps most of the easy money has been made.
Here are some portfolio approaches that may be useful in today’s environment:
Revisit – The good news is that this doesn’t require a dramatic shift in positioning. What it does require is a re-engagement with process. After meaningful runs, portfolios tend to acquire positions that have worked well, but their purpose in the portfolio could be dwindling.
Now is the time to revisit the portfolio and ask the simplest of questions, “If I didn’t already own this today, would I be buying it now?”. Those who no longer earn their seat can either be trimmed or rotated somewhere else. This is not about calling the top; it’s a maintenance check.
Rebalance – Selling is almost always more difficult than buying, especially when everything is going up. But taking partial profits doesn’t have to mean you’re turning bearish; it means maintaining discipline.
Rebalancing portfolios is typically something that takes place at your annual meeting, when you see a client and discuss the positioning. In reality, rebalancing should be more market-driven. It remains a very effective and underappreciated portfolio process. By trimming positions that have grown beyond their intended size and adding to those that have lagged, investors maintain a balance that is not to be considered when timing markets.
In a scenario like this one, where everything is up, rebalancing may be easier said than done. The challenge, of course, is that doing it in an “everything rally” often means trimming positions you still like and redeploying into areas that have also performed, just not as well. It feels counterintuitive. But even if the proceeds simply shift toward underweight areas, short-term instruments, or diversifiers, the act itself restores portfolio symmetry and removes some of the embedded concentration risk that success can quietly create.
Build Flexibility – Holding some dry powder also becomes valuable when valuations are extended. In periods like these, cash is not a wasted asset. Especially with decent yields, it becomes optionality. Allowing cash to drift higher, even just a few points, provides flexibility when opportunity shows up.
The trick for success is to be intentional with that cash. Have a plan for what you would want to buy if markets pull back 10%. Optionality is only useful if you know how you intend to use it. Many of us think we have a plan in our minds, but it never feels right when things start going south.
Diversify Defence – It’s no secret that the correlation between bonds and equities has remained elevated in recent years. While a repeat of 2022’s bond drawdown is unlikely, given that the aggressive global rate-hiking cycle is now behind us, bonds have continued to move in step with equities as rates drift lower. They still play an important role as stabilizers, but it's worth acknowledging that the relationship has not been as diversifying as it once was.
That doesn’t mean they’re broken; it just means that diversifying your defence can be an area to look at. Incorporating other tools, such as real assets, volatility management, or yield strategies, can enhance resilience if correlations are maintained. Every correction looks different; there is no script.
Challenge Consensus – In markets where everything is working, it’s easy to forget that leadership always rotates, sooner or later. Strength feels permanent, but it never is. Right now is the time when it can pay to look where others aren’t – those areas that have simply been left behind.
The best opportunities rarely emerge from what is already popular. If you bring out your contrarian side and it works out, those are the trades the clients will remember. The asset classes no one wants to talk about today might quietly set up the next leg; it’s certainly happened before. As Don Coxe puts it,
“The most exciting returns are to be had from an asset class where those who know it best, love it least, because they have been hurt the most.”
Communicate – For advisors, this also presents a significant behavioural challenge moving forward. When portfolios are performing this well, it’s easy for clients to equate success with control. But good outcomes don’t always come from good decisions, especially when everything is moving in the same direction. Setting expectations for future growth becomes critical. Returns of this magnitude for balanced portfolios are unlikely to persist indefinitely, and a reversion to more normal performance is not a sign that the process has failed. It’s entirely market-driven. Communicating the message now, while sentiment is high, can prevent panic later when the cycle ultimately cools and moods sour.
Despite the suggestion that there’s “nothing left to do,” I was pleasantly surprised to see that many advisors have been active. In our recent survey, over half of advisors said they’ve been more active than usual, while only a small portion reported being less active. That engagement is exactly why clients choose to work with advisors: because when markets feel easy, they don’t sit still. If you were to ask the same question to a “DIY” investor, I bet the results would likely be drastically different.
The broader themes remain clear: revisit your process; trim, don’t time; let cash drift a little higher; diversify your defence; look to what’s unloved; and keep communicating with clients. It doesn’t take sweeping changes to stay prepared. Sometimes, small adjustments are all it takes to keep portfolios aligned and forward-looking.
If you’d like to tackle some of these approaches with additional insights or discuss how they could apply to your current positioning, reach out to our team through our partnership program. It’s built around ongoing collaboration through sharing ideas, portfolio comparisons, and market insights that help advisors stay ahead.
Final Thoughts
There hasn’t been much to be upset about this year. So far, the only real regret is probably anything that was sold. Enjoy it while it lasts, but don’t let comfort turn into complacency. Perfect markets never stay that way for long.
— Brett Gustafson is an Associate Portfolio Manager at Purpose Investments
Sources: Charts are sourced to Bloomberg L.P.
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