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 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:
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.
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.
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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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.