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With the traditional mix of stocks and bonds now riskier, here are ways to diversify, says BlackRock

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  Published in Stocks and Investing on Wednesday, September 10th 2025 at 14:19 GMT by MarketWatch
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BlackRock Recommends a New Playbook for Diversifying the Classic 60/40 Portfolio

By [Your Name] – 2025-09-10

The classic 60/40 mix—60 % equities and 40 % bonds—has been the default “core” allocation for investors for decades. But as interest rates rise, inflation stubbornly lingers, and geopolitical tensions threaten global markets, the traditional core is proving increasingly fragile. In a recent feature on MSN Money, BlackRock’s research team outlines a suite of strategies to shore up that foundation and broaden the horizon of diversification.

Why the 60/40 Rule Is Less Safe Now

BlackRock’s data shows that the volatility of the core 60/40 portfolio has climbed noticeably over the past 12 months. The firm notes that the standard deviation of returns for a 60/40 portfolio that historically delivered 7 % average annualized returns now sits at around 10 %, versus the 7 % it enjoyed in the pre‑COVID era.

The underlying drivers are simple yet stark:

• Rising rates – As the U.S. Federal Reserve hikes the federal funds rate, long‑dated bonds lose value, compressing the bond portion of the portfolio.
• Persistent inflation – Inflation erodes real returns, especially for nominal fixed‑income holdings.
• Geopolitical shocks – Trade tensions, cyber‑security threats, and political upheavals add uncertainty to global equity markets.

Because stocks and bonds have become more correlated during stressed periods, the diversification benefit they historically offered is eroding. BlackRock’s research suggests that investors who simply maintain a 60/40 split may be exposed to a larger upside‑down risk profile than they realize.

The “Core‑Satellite” Model Gets a Make‑over

Rather than abandoning the core, BlackRock recommends re‑imagining the core–satellite approach. The idea is to keep a solid base (the core) but add multiple satellite layers that each provide distinct risk and return characteristics.

1. Core – Low‑Cost Indexing
   Keep the core lean and efficient with broad market index funds. BlackRock’s iShares lineup, such as the iShares Core S&P 500 and the iShares Core U.S. Aggregate Bond ETF, remains a cost‑effective backbone.

2. Satellites – Tactical and Thematic Allocation
   BlackRock’s research highlights three main satellite categories that can be mixed and matched based on risk appetite:

   • Alternative Equities – Small‑cap, mid‑cap, and emerging‑market equities show lower correlation with large‑cap U.S. stocks. Adding 10‑15 % exposure to a small‑cap ETF (e.g., iShares Russell 2000) can enhance return potential without a commensurate spike in volatility.
   • Real‑Assets & Inflation Hedges – Real estate (REITs), commodities, and inflation‑linked bonds (TIPS) help protect against rising prices. A 5‑10 % allocation to a commodity index or a TIPS ETF can serve as a safety net during inflationary periods.
   • Alternative Investments – Private equity, infrastructure, and hedge‑fund‑style strategies deliver non‑correlated returns but come with higher fees and liquidity constraints. BlackRock notes that investors should keep this portion modest—typically 5‑10 %—to balance the benefits against the costs.

3. Factor‑Based Tilts
   BlackRock’s iShares Edge ETFs (e.g., iShares Edge MSCI Min Vol USA ETF and iShares Edge MSCI USA Value Factor ETF) provide systematic factor tilts that can reduce portfolio volatility or boost returns. Factor investing can be seen as an advanced satellite layer that offers risk‑adjusted gains without the illiquidity of private markets.

4. Global Macro & Currency Exposure
   For risk‑tolerant investors, adding managed‑future or macro funds can provide upside potential in a low‑rate environment. Currency overlay strategies can also hedge against foreign exchange volatility that might otherwise erode international equity gains.

Putting It All Together – A Sample Allocation

BlackRock’s own “Diversify, Don’t Complicate” worksheet offers a practical framework:

While the exact numbers will differ for each investor’s profile, BlackRock stresses that the key is to maintain a clear “risk budget” that aligns satellite allocation with core risk tolerance.

Practical Tips for Execution

1. Start Small – Test a new satellite with a 2‑3 % allocation before scaling up.
2. Leverage Low‑Cost ETFs – Most satellite layers can be accessed via ETFs, keeping fees manageable.
   Reference: BlackRock’s ETF list (https://www.blackrock.com/ie/en/individuals/etfs).
3. Review Regularly – Rebalance every 12–18 months or when major macro shifts occur.
   Reference: BlackRock’s rebalancing guidance (https://www.blackrock.com/ie/en/individuals/education/rebalancing).
4. Stay Informed – BlackRock publishes quarterly market outlooks. Subscribe to the BlackRock Global Investment Management newsletter for updates.
   Reference: BlackRock’s research portal (https://www.blackrock.com/ie/en/individuals/insights/).

The Bottom Line

The risk‑return landscape is evolving, and clinging to the same 60/40 formula may leave investors exposed to hidden volatility. BlackRock’s research suggests that a deliberate, structured diversification strategy—grounded in core indexing but enriched with carefully chosen satellite layers—offers a more resilient path forward. By incorporating small‑cap equities, real‑assets, and a touch of private markets, investors can protect against inflation, benefit from lower correlation, and ultimately pursue a more stable, growth‑oriented portfolio.

For more in‑depth analysis and tools, visit BlackRock’s official site: https://www.blackrock.com.