Insight & Outlook: Fidelity Market Signals Weekly

Rethinking the "40" in 60/40 portfolios

Look beyond the headlines: The biggest portfolio construction story may not be what is happening inside the “60,” but the growing possibilities inside the “40.”

During much of the post-GFC period, cash yielded next to nothing, bond yields hovered near historic lows, and investors seeking meaningful income often found themselves pushed further out on the risk spectrum. Equities became the primary source of return, while fixed income frequently served one purpose: diversification. Today, the environment looks a little different. With yields substantially higher across much of the fixed income universe, and the Fed raising rates once again, advisors have an opportunity to rethink fixed income’s role in portfolio construction.

What is the purpose of the "40”?

For decades, the traditional balanced portfolio has been described as 60% growth assets and 40% diversifiers. Yet the "40" was never intended to be a static collection of bonds. Instead, its role was to help investors achieve broader portfolio objectives. Sometimes that meant reducing volatility. Sometimes that meant generating income. Sometimes that meant preserving capital. Over the last 15 years, however, many investors came to think about the “40” in a much narrower way. When yields were compressed, generating income became increasingly difficult. Bonds often provided diversification benefits but offered less support for cash-flow needs, leading many investors to shift their focus toward portfolio growth.

Now that trade-off may no longer be necessary. Higher starting yields have changed the math. Rather than relying on fixed income primarily as a portfolio shock absorber, advisors may once again be able to use it to generate meaningful income while diversifying equity risk. A recent Fidelity Market Signals commentary indicated that today's higher yields may provide opportunities across multiple fixed income sectors, allowing investors to benefit from carry, income generation, and diversification without necessarily extending into longer-duration bonds.

In many ways, this may represent one of the most underappreciated investment opportunities available. The conversation surrounding markets often centers on stocks: Which sectors are leading? Which themes are emerging? Which companies are growing the fastest? But investors do not build portfolios with stocks alone. Portfolio construction is about combining assets with different return drivers, different risk characteristics, and different sources of income. When yields were near zero, many of those building blocks looked relatively similar.

Over time, the menu of roles fixed income can play in a portfolio has expanded considerably:

• Treasuries can provide quality and liquidity.
• Investment-grade corporate bonds can potentially provide attractive income, while maintaining a relatively strong credit profile.
• Securitized assets may offer differentiated sources of return.
• Municipal bonds can provide tax-aware income opportunities for certain investors.
• Preferred securities and dividend-oriented strategies can potentially bridge the gap between traditional stocks and bonds.
• And floating-rate investments, including leveraged loans and AAA collateralized loan obligations (CLOs), introduce a completely different set of characteristics that deserve attention in the current market environment.

One area in particular that may merit renewed consideration is leveraged loans.

Unlike traditional fixed-rate bonds, leveraged loans generally carry floating-rate coupons that adjust with short-term interest rates, helping to reduce interest-rate sensitivity while maintaining attractive levels of income. In this leveraged loan research, Fidelity experts found that leveraged loans have historically exhibited very low duration exposure and been among the most consistent inflation-fighting asset classes over the past three decades. Since 1992, their rolling returns have exceeded CPI inflation more frequently than many traditional inflation-sensitive asset classes (Exhibit 1).

In addition, leveraged loans have historically helped preserve purchasing power, while offering high-single-digit yields. As of May 2026, their yield-to-worst stood at 8.1%, the highest among public market fixed income sectors (Exhibit 2). Higher starting yields can also provide a cushion against potential price declines.

Beyond income, leveraged loans can also help advisors think differently about diversification. Diversification needn’t be derived exclusively from owning longer-duration bonds. It can also come from owning assets with different risk factors, different income streams, and different sensitivities to economic and market conditions. Fidelity research suggests that floating-rate loans can serve as a strategic allocation within diversified portfolios, rather than simply a short-term tactical position.

Of course, every asset class carries risks.

Credit spreads can widen. Defaults can rise. Markets can become more volatile than expected. That is precisely why today's broader opportunity set matters. Advisors have access to a wider range of tools that can potentially help balance growth objectives, income needs, and diversification goals—and this may be the most important lesson of this investment regime. The debate should not be whether the 60/40 portfolio is “dead,” but whether it has evolved. Once viewed as a defensive allocation, the “40” can now do more to help manage risk, provide potential sources of return, and create opportunity.