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You've probably heard the classic advice: put 60% of your portfolio in shares, 40% in bonds, and let time do the work.

It's been the default investment set up for decades.

And the 60/40 portfolio worked so well historically that it delivered positive returns in 35 of 42 years between 1980 and July 2022 (or 83% of the time).

But in 2022, inflation spiked and central banks jacked up interest rates aggressively. And suddenly, both stocks and bonds fell at the same time.

All of a sudden, US equities dropped roughly 19% and the Bloomberg Agg Bond Index fell approximately 13%, marking the worst joint performance for the pair in over 40 years..

So the portfolio that was designed to provide balance suddenly looked a lot less balanced.

What happened to the 60/40 portfolio?

Think of the 60% stocks, 40% bonds portfolio like a seesaw. One side goes up, the other comes down… with the idea that your portfolio remains roughly stable.

When the sharemarket had a bad day, investors piled into bonds and bond prices went up. It was like having a backup parachute.

From the 1980s through to 2021, stocks and bonds were negatively correlated for most of that period.

But here's the thing: that relationship broke down in 2022, when inflation surged and central banks lifted interest rates fast.

Higher rates push bond prices down, so when shares fell on the back of the same rate hikes, both sides of the seesaw dropped at once.

So what's the new playbook?

The good news: the same higher-rate environment that broke the old formula has actually created some better opportunities.

One approach that's emerged in response to this environment is more active fixed income management. That means rather than holding a fixed bond allocation, some funds move dynamically across bond types depending on where the risk-reward is most attractive.

Schroder's Absolute Return Income Fund (SARI) is one example of this kind of approach.

Rather than sitting in a fixed mix, it actively moves across corporate bonds, government bonds, asset-backed securities and more. It hunts for income where it's most attractive and dials down risk when it's not being rewarded.

It targets "cash-plus" returns, meaning returns above what you'd get from a basic savings account. It actively manages volatility with an eye on protecting those gains. Though like all investments, returns aren't guaranteed and the target may not always be met.

The 60/40 rule served investors well for a long time. But markets change, and the strategies built around them need to change too.

This article was produced in partnership with Schroders. Before making any investment decision, you should consider seeking independent professional advice and read the relevant Product Disclosure Statement at schroders.com.au.

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This document is issued by Schroder Investment Management Australia Limited (ABN 22 000 443 274, AFSL 226473) (Schroders).

This document does not contain and should not be taken as containing any financial product advice or financial product recommendations. This document does not take into consideration any recipient’s objectives, financial situation or needs. Before making any decision relating to a Schroders fund, you should obtain and read a copy of the product disclosure statement available at www.schroders.com.au or other relevant disclosure document for that fund and consider the appropriateness of the fund to your objectives, financial situation and needs. You should also refer to the target market determination for the fund at www.schroders.com.au. All investments carry risk, and the repayment of capital and performance in any of the funds named in this document are not guaranteed by Schroders or any company in the Schroders Group.

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