Is 70/30 the New 60/40? It Shouldn’t Be.
The 60/40 portfolio—a time-tested allocation of 60% equities and 40% fixed income—has been a cornerstone of moderate investing strategies for decades. Yet, recent market dynamics have shifted many portfolios away from their intended balance. Without proper management and regular rebalancing, what began as a moderate 60/40 allocation may now resemble a more aggressive 70/30. This quiet transformation carries the risk of significant implications for investors who rely on the stability of a balanced portfolio.
The Drift to 70/30: How It Happens
Over the past few years, equities have significantly outperformed fixed income, driven by robust stock market gains and the headwinds facing bonds amid rising interest rates. As a result, equity allocations in many portfolios have ballooned. While the immediate benefits of equity-driven growth may seem appealing, the increased exposure to equities brings greater risk. A higher equity weighting amplifies volatility and can lead to outsized losses during market downturns, undermining the stability that investors seek from a 60/40 allocation.
The Hidden Risk Within Equities: Concentration in Large-Cap Growth
The risks of imbalance go beyond the simple equity-to-fixed income ratio. Within the equity allocation itself there’s been a growing concentration in large-cap growth, driven largely by the "Magnificent 7" (a group of dominant tech and tech-adjacent companies including Apple, Microsoft, Alphabet, Amazon, Meta, Tesla, and Nvidia). These companies have been responsible for a disproportionate share of equity market returns in recent years, especially within indices like the S&P 500.
This super-concentration in large-cap growth poses a dual threat:
- Equity Skew: Even if an investor’s overall equity allocation seems reasonable, the internal composition of that equity exposure may be heavily tilted toward large-cap growth. This creates an imbalance that amplifies risks tied to the performance of just a handful of stocks.
- Portfolio-Level Impact: The dominance of the Magnificent 7 means that their performance disproportionately affects the overall portfolio. For investors whose portfolios have drifted to 70% or more in equities, a substantial portion of that exposure may now be tied to these mega-cap stocks. This concentration increases vulnerability to sector-specific or company-specific risks, undermining the diversification that a balanced portfolio is supposed to provide.
Rebalancing: A Critical Discipline
The combination of equity market outperformance and large-cap growth dominance highlights the importance of rebalancing. Regular rebalancing involves not just realigning the equity-to-fixed income ratio, but also addressing concentration risk within the equity allocation itself. Paring back on overexposed assets—whether they’re equities as a whole or disproportionately large positions in mega-cap stocks—and allocating to underweighted areas can restore the intended diversification and risk profile.
Why Balance Still Matters
The purpose of a balanced portfolio like the 60/40 model is not just about achieving steady returns, it’s about managing risk. Fixed income provides stability, acting as a counterbalance to the inherent volatility of equities. Within equities, diversification across geographies, sectors, market capitalizations, and styles helps protect against the overconcentration of risk. Allowing large-cap growth stocks to dominate an equity allocation undermines this principle, leaving portfolios exposed to the fortunes of a few companies.
The Bottom Line
For most moderate investors, 70/30 is not a prudent replacement for 60/40. While equity market gains may have driven recent portfolio growth, this drift toward higher equity exposure, coupled with an overconcentration in large-cap growth, introduces risks that could derail long-term objectives.
Advisors and investors must remain vigilant, rebalancing not just between equities and fixed income, but also within equities to address concentration risks. Staying disciplined in maintaining diversification and balance is essential to navigating the evolving market landscape while preserving the integrity of a portfolio’s risk profile.
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The Freedom Advisors investment team is focused on curating our model marketplace so you can focus on your clients and your business. If you would like to discuss your current portfolios or learn about our complete portfolio management solution, schedule an introductory call.
Advisory services are offered through Freedom Investment Management, Inc. ("Freedom"), a registered investment adviser. Freedom does not provide tax or legal advice. The information contained herein is for informational purposes only. This is not an offer to sell securities or provide investment advice. Investment strategies carry varying degrees of risk to include total loss. The representations and opinions herein are the opinions and view of Freedom and are believed to be reliable but are not guaranteed by Freedom nor its affiliates. When applicable, sources used in forming Freedom’s opinion are cited, however, other sources may be available which contradict Freedom’s opinion, process, and methodology. Potential investors are advised to consult with their financial, tax and/or legal advisors prior to investing.
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