Alternatives to 60/40 portfolios

By Katie Keir | November 25, 2016 | Last updated on September 21, 2023
8 min read

The classic 60/40 split between growth and safety is ineffective in today’s environment, say experts, who suggest finding alternative strategies for clients.

“People are living longer and can’t get the returns they need out of fixed income,” says Nicholas Aristeo, vice-president and portfolio manager at 3Macs, Raymond James, in Montreal. “Five-year bond yields are around 2% and that doesn’t even match inflation. So 60/40 is definitely out the window.”

Plus, clients are aware there are more strategies available. Diversification through global strategies is easier and less expensive with products like ETFs, says Eric Kirzner, professor of finance at the Rotman School of Management in Toronto. “In the 1970s and early 1980s, global investing wasn’t easy. There were some countries you couldn’t invest in at all, such as India. But [that’s changed] and you don’t need the same conservative asset allocation” to achieve diversification, he says.

That’s why tailoring portfolios to clients’ needs is more valuable than rigid portfolio models, as is more actively managing and rebalancing those portfolios. Liquidity is also important to take advantage of market opportunities as they arise. Along with Aristeo and Kirzner, we also spoke to Deborah Frame, president and CIO of Frame Global Asset Management in Toronto, and Peter Wong, vice-president and portfolio manager at Raymond James in Vancouver, for their tips and investment strategies.

Q: What alternatives exist to the traditional 60/40 approach?

Aristeo: The 60/40 [portfolio] isn’t useful if an investor has a high risk tolerance and a time horizon that’s able to accept a blue-chip equity portfolio. If there’s also no need to draw down on capital in the short term, then you theoretically don’t need any fixed income to match cash flow needs. You could be 100% equity: 80% medium risk and 20% high risk.

Frame: When you think of the old way of managing money—buy and hold at 60/40—you’re striving for the best returns from stock picking rather than looking at the probability of losses. So, a 60/40 portfolio typically looks the same in a growth versus recession environment. But, I’ve been through times where I couldn’t find stocks that I thought were going to grow, and where I had to have a minimum of 40 stocks because of investment policy guidelines. […] Instead, managers should have permission to be as high or low in any asset class as they see fit, and they should be able to go 100% cash if needed. That’s how we manage money: driven by a macro view, tactically unconstrained, and we look at downside risk. And those are three things that you will rarely find in a 60/40-type approach.

As of November 10, 2016, our most conservative portfolio has 76% bonds, 12% equities, 10% gold and 2% cash; our most aggressive portfolio has 53% bonds, 35% equities, 10% gold and 2% cash. U.S. equity ranges from 7% (conservative) to 20% (aggressive). Aside from cash, that’s all in ETFs.

A U.S.-based 75/25 portfolio would have beat a 60/40 portfolio in the high-growth, rising interest rate environments of the 1950s and 1960s. But volatility would have been higher and returns only slightly better over the 1928 to 2014 period.

Source: Ben Carlson, author of A Wealth of Common Sense: Why Simplicity Trumps Complexity in Any Investment Plan

Wong: Instead of sticking to 60/40, [as of July 2016] I use the following mixes for higher-risk, medium-risk and conservative clients.

Growth and income:

  • 25% bonds and cash;
  • 25% U.S./foreign stocks;
  • 25% Canadian stocks;
  • and 25% alternatives and sector funds or ETFs.


  • 35% bonds and cash;
  • 30% U.S./foreign stocks;
  • 15% Canadian stocks;
  • and 20% alternatives and sector funds or ETFs.

Income and growth:

  • 45% bonds and cash;
  • 20% U.S./foreign stocks;
  • 20% Canadian stocks;
  • and 15% alternatives and sector funds or ETFs.

If a client is looking for more growth, we look at alternatives such as gold and offering memorandum products. If they’re seeking income, [you can look at] long-short alternatives, which are typically part of a hedging strategy, as well as multi-strategy products. For foreign content, we take advantage of ETFs.

I use cash due to the [need for liquidity to take advantage of opportunities]; think of the U.K. election and volatile commodity prices. Sector funds are […] focused on geographical areas, countries and industries.

Major portfolio management developments

1930s – 1940s

Monte Carlo simulation first used in calculation of neutron diffusion. Mathematicians Stanislaw Ulam and John von Neumann use the simulation to develop algorithms.


Economist Harry Markowitz invents portfolio optimization based on risk, reward and the correlation of assets; Modern Portfolio Theory is born.


In his book on portfolio theory, economist William Sharpe studies main risks in individual investment: systematic risks that can’t be diversified away (e.g., recessions) and unsystematic risks (e.g., those tied to specific stocks); Capital Asset Pricing Model is born.

1984 – 1995

Gary P. Brinson and colleagues publish “Determinants of Portfolio Performance” and a follow-up study. Their analysis finds a portfolio’s success is based on asset allocation, security selection and market timing.


The market crash spurs a search for more robust portfolios, but Markowitz’s principles are still relied upon.

Source: Morningstar Direct paper, “The new efficient frontier: Asset allocation for the 21st century.”

Q: Are bonds still useful, given today’s low rates?

Wong: They are if you aren’t buying plain-vanilla bonds. Say we’re buying corporate bonds for someone younger; those pay a higher yield than a traditional bond and would have a short duration. If we don’t hold bonds, I tie in cash. Or, we’d sit in a high-performing money market fund. We need this liquid component for compliance reasons to meet the required asset allocation model, and to take advantage of opportunities. For instance, say we want to take advantage of small- or mid-cap stocks, which are a lot more vulnerable on declines like we saw in January 2016.

Aristeo: When cash flow needs come into play for older investors or those who need liquidity, that’s when you need to look at fixed income. If we know a client needs $50,000 per year for the next three years, then you look at the income that the portfolio sets out. You may have a steady flow of dividends, which is preferable. Still, even though bonds aren’t the right place to be investing, you may need to buy fixed income so you know the money a client needs is going to be there.

However we’ve been in a 30-year bond bull market and I think we’re pretty much at the end of that. Rates can stay at low levels for a while, but if you’re getting an average yield of 2% and you’re paying a 1.75% MER on a bond mutual fund, then what’s left? The solution for most people is to buy GICs, get a better rate of return and accept zero risk, or to buy lower-cost bond ETFs. For the latter, make sure you stay short duration and high quality, and then complement that with convertible bond issues from good companies.

Q: How often do you rebalance? And, when might clients’ allocations change?

Aristeo: We rebalance based on clients’ income needs and the ideal weightings for our portfolio positions, rather than every nine months or year. Generally, we don’t hold positions in one asset of more than 5%—unless it’s a real opportunity. A more speculative position might get 3% or 4%, and then we might bring it back to 2%, where we feel comfortable, for instance. Or, if a blue chip we’re holding gets to 6% or 7%, we’ll taper.

We’ll also do event-driven rebalancing. Take Brexit: before the U.K. vote, we were pretty much fully invested. But we knew the event was coming, and raised our cash position from about 6% to [about] 12%. Then, we had that cash to take advantage of opportunities. If none had come up, we still had 80% to 85% of the portfolio working for us. But even though rebalancing isn’t rigid, there’s usually no need to time markets if you buy great companies and accumulate dividends.

If a client needs to buy a house or is approaching retirement, for example, we’ll also start looking at rebalancing. We’ll accumulate cash and get out of the market slowly during opportune times. We don’t change allocations in one day.

Wong: Rebalancing once or twice a year would be typical, pending market conditions. I also review portfolios when I send out quarterly reports for my managed accounts.

Frame: We review portfolios every month, based on where we think we’re going to be over the next 12 months. We tag all our return data for about 40 asset classes and continually monitor [them]. For all 40, we update expected mean returns, and we also look at the probability of returns going negative. We aim for portfolios that give us the highest return combinations, but we also constrain them so we have a 5%-or-less chance of going negative, as well as a 10%-, 15%- and 20%-or-less chance, depending on the client’s risk tolerance.

Rebalancing can also be done based on whether investors’ needs and goals are met. If you had projected you were going to earn 6% on a portfolio, and you’re earning 10% and you’ve done so for five years, you should be adjusting because you’re ahead. Conversely, if we’re in a soft market and you haven’t done as well, you might want to put some risk back on.

Investment opportunities and risks

North America: We’re primarily invested in the U.S., says Deborah Frame, president and CIO of Frame Global Asset Management. And within that market, “we have a much greater tilt to the mid- and small-cap companies. The reason is large-cap companies in the U.S. have a higher level of exposure to foreign earnings that get translated back into U.S. dollars. In fact, between 40% and 50% of S&P 500 companies are bringing in earnings from outside of the U.S.” amid the country’s strong currency, she says. To get mid-cap exposure, she uses an S&P 400 ETF.

“The U.S. is still, in relative terms, a better place to invest, but I don’t think it’s a better place to invest in terms of its stock market anymore,” Frame says. She’s increased her short-term Treasuries exposure of late due to market uncertainty.

Canadian exposure, which she obtains through a currency-hedged MSCI Canada ETF, ranges from 5% (conservative) to 15% (aggressive). This exposure acts as a diversifier but, knowing that U.S. president-elect Trump’s potential trade renegotiations could affect Canada, she’s watching her allocation.

Global: This year, Frame’s most aggressive portfolio had exposure to Australia, but, after a rate increase, she shifted into long-term U.S. treasury bonds. Then, after August, she moved that exposure into three- to 10-year Treasuries.

“We also had exposure in the U.K. since the beginning of the year, but like most people, we did not expect Brexit would be approved. Nobody wants any exposure when there’s uncertainty.” As of November 10, 2016, she has no exposure to Europe or the U.K.

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Katie Keir

Katie is special projects editor for and has worked with the team since 2010. In 2012, she was named Best New Journalist by the Canadian Business Media Awards. Reach her at