Every time the market does something unexpected, someone declares the 60/40 portfolio dead.

2022 was the most recent death notice.

Bonds had their worst year in decades, dropping double digits at the same time stocks fell. The whole premise of the strategy -- that stocks and bonds move in opposite directions -- seemed to fall apart all at once.

Then 2025 happened.

A more diversified portfolio outperformed a basic 60/40 by about 5 percentage points last year. That was the biggest advantage for diversification since 2009. International stocks gained 32% while US stocks gained 18%. Gold surged nearly 70%.

Here is the thing: the diversified portfolio won in 2025. But one year does not make a strategy.

The 20-year track record tells a different story.

So the question is not whether diversification worked in 2025. It did. The question is which assets actually improve a retirement portfolio over time -- and which ones just add complexity.

What "Diversified" Actually Meant in 2025

Morningstar's 2026 Diversification Landscape report compared a basic 60/40 against a more diversified mix that included small-cap stocks, international stocks, REITs, gold, commodities, and multiple bond categories.

The diversified portfolio returned 18.3%. The 60/40 returned 13.3%.

That is a real difference.

But most of that gap came from two things: international stocks and gold. Strip those out and the advantage shrinks considerably.

The diversified portfolio did hold up better during turbulent stretches -- including the tariff-driven pullback in the spring of 2025. So there is a real risk management argument. It just does not override two decades of evidence that says the simpler approach wins over time.

International Stocks Are Worth Owning Again

From 2009 through 2024, non-US stocks returned about 7.6% annualized.

US stocks returned 14.5% over that same stretch.

If you held international stocks through most of that period, it felt like a mistake.

2025 changed the picture. The Morningstar Global Markets ex-US Index gained 32% -- nearly double what US stocks returned.

Part of that was dollar weakness. When the US dollar falls relative to other currencies, international investments gain value when you convert them back. Part of it was valuation. Non-US markets entered 2025 cheaper, and cheaper markets have more room to run.

Here is what matters going forward.

The correlation between international and US stocks has been dropping. Over the three years ending in 2025, that correlation was 0.74, down from as high as 0.93 in prior periods. The lower the correlation, the more genuine diversification benefit you get from holding both.

International stocks are doing what a diversifying asset is supposed to do again.

We include international stocks in client portfolios at Gudorf Financial Group because the data supports it. The data also supported it during the years they underperformed. Diversification is not a bet on short-term performance. It is a structural decision about how a portfolio holds up across a full market cycle.

Here is a full post on why international stocks belong in a retirement portfolio.

Bonds Are Back as Portfolio Ballast -- With One Caveat

After 2022, a lot of investors wanted to reduce or eliminate bonds.

I understand why.

When bonds and stocks drop at the same time, it is natural to question whether the bond allocation is worth holding.

2025 answered that question.

The US Core Bond Index returned about 7% for the full year -- its best result since 2020.

When stocks dropped about 9% during the tariff turmoil in April 2025, bonds gained 1%.

Over the full year, bonds posted positive returns in 21 of the 25 weeks when US stocks finished negative.

The stock-bond correlation shifted back into negative territory in 2025, meaning stocks and bonds were moving in opposite directions again. That is exactly the relationship you need from a ballast position in a retirement portfolio.

The concern that bonds had permanently stopped working as a diversifier was not borne out by the data.

2026 has introduced a new wrinkle. Oil and gas prices have spiked due to supply disruptions in the Middle East, putting inflation concerns back on the table. Longer-duration bonds are more sensitive to interest rate changes, which makes them more volatile when inflation is running hot.

Our approach at Gudorf Financial Group is to hold a majority of bond exposure in short-duration, high-quality US Treasury bonds.

Treasuries hold up better during market stress than corporates, municipals, or other bond categories that are more sensitive to credit conditions and rate swings.

For clients who are in drawdown -- pulling from the portfolio each month to cover living expenses -- we also maintain what we call a war chest. That is a reserve of cash and short-term bonds kept separate from the core portfolio. It covers near-term spending needs so you are not forced to sell stocks during a downturn at the wrong time.

Here is more on why that cash buffer matters in retirement.

What Is Not Worth Adding to Your Portfolio

Here is where I want to push back on some of what gets marketed as diversification.

Gold. The 2025 run was real -- nearly 70%. But over the past three years, gold was actually more volatile than US stocks despite its reputation as a safe haven. It goes through extended drawdowns that can last years. A retiree pulling income from a portfolio cannot afford to wait out a multi-year drawdown in an asset that was supposed to protect them.

Cryptocurrency. Low correlation with stocks? Yes. But the volatility is extreme. For someone who needs their portfolio to generate consistent income, those swings are not acceptable regardless of how the correlation math looks on paper.

Private equity and private credit. On paper, they appear to have low correlations with public markets. That is mostly because the underlying assets do not trade every day, so there is no constant price discovery. When you adjust for that smoothing effect, the correlation with public equities is much higher than it appears.

Private equity buyout strategies track closely to small-cap value investing. Venture capital tracks closely to small-cap growth. You are taking on much of the same risk as public market equivalents -- but with higher fees, less liquidity, and less transparency.

We do not use gold, cryptocurrency, or private equity in client portfolios at Gudorf Financial Group. The fees and underperformance do not add value that justifies the space they take up.

What the Long-Term Data Shows About the 60/40 Portfolio

Here is the part that gets overlooked when someone points to a single strong year for diversified portfolios.

Over the trailing 20-year period, the basic 60/40 portfolio beat the more diversified benchmark on both total returns and risk-adjusted returns.

It also delivered better risk-adjusted results than a 100% equity portfolio in about 80% of rolling periods going back to 1976.

One year of outperformance from a diversified portfolio does not override two decades of evidence.

The 60/40 is not perfect. 2022 was a real and painful exception to how it is supposed to work. But a strategy does not need to be perfect to be the right foundation. It needs to work reliably over the time horizon that matters.

For most retirees, that time horizon is 20 to 30 years.

Over that window, the 60/40 has earned its place.

How We Build Retirement Portfolios at Gudorf Financial Group

The right portfolio for a retiree is not determined by picking an asset allocation and working backwards.

At Gudorf Financial Group, we build the retirement income plan first.

That means figuring out what income the portfolio needs to generate, when it needs to generate it, how Social Security and any other income sources fit in, and what the client's actual spending needs look like year by year.

From there, we look at two things.

Risk tolerance is how much volatility a client can stomach without making bad decisions during a downturn.

Risk capacity is how much the portfolio can afford to lose without putting the retirement income plan in jeopardy.

Both matter. When they conflict, the retirement income plan wins.

From that foundation, we build a diversified investment portfolio that includes large-cap stocks, small-cap growth stocks, international equities, REITs, and a bond allocation weighted toward short-duration, high-quality Treasuries.

The specific mix depends on each client's plan and where risk tolerance and risk capacity intersect -- not on what performed best last year.

Here is a breakdown of how we approach retirement portfolio construction.

Here's What Matters

• The 60/40 portfolio is not dead. It beat diversified benchmarks over the trailing 20 years on both total returns and risk-adjusted returns. One strong year for a diversified portfolio does not change that.
• International stocks earned their place back in 2025. Correlation with US stocks has dropped, dollar weakness is a tailwind, and non-US valuations are still favorable.
• Bonds still work as ballast. 2022 was the exception, not the rule. In 2025, bonds cushioned every meaningful stock pullback. For retirees in drawdown, that function matters more than most people realize.
• Watch your bond duration in 2026. Short-duration Treasuries carry less interest rate risk and hold up better when inflation is a concern.
• Gold, crypto, and private equity are not reliable diversifiers. The fees are real. The 20-year track record is not what the pitch decks show.
• Build the retirement income plan first. The portfolio follows from the plan -- not the other way around.

👉 If you would like to get a FREE retirement assessment, click the link to schedule your 20-minute call to start the retirement assessment process.

Gudorf Financial Group is a fee-only, fiduciary retirement planning firm based in Dayton, Ohio. We work with clients in the Dayton and Cincinnati area and nationwide via Zoom.