De-Risking Portfolios Near Retirement: Looking Beyond Bonds

The idea of de-risking a portfolio is straightforward. As retirement approaches, investors are typically advised to reduce exposure to equities and increase allocations to bonds, with the expectation of creating a more stable, income-oriented portfolio. As Warren Buffet once put it, “Diversification is protection against ignorance.” The challenge, though, is that a large part of diversification depends upon how assets behave, not just how they are grouped.

That framework assumes that bonds will behave differently from equities, particularly during periods of market stress. Essentially, when interest rates rise, bond prices fall, while equities tend to move through longer cycles of expansion and contraction, with drawdowns that can be more abrupt than the recoveries that follow. In recent years, that relationship has been less consistent. Periods of rising inflation, shifting monetary policy, and tighter liquidity have led to environments where both asset classes have declined together, challenging the role bonds are expected to play. Despite this, the conventional approach to retirement planning remains largely unchanged, with increasing bond exposure still viewed as the primary way to de-risk a portfolio.

Whether that approach remains sufficient in a market environment where correlations can shift and diversification may not behave as expected is becoming less certain.

What Does It Mean to De-Risk a Portfolio Today?

De-risking is often framed as reducing volatility or shifting toward more conservative assets. That framing is useful, but it doesn’t always capture what investors are trying to guard against. The primary objective is often to limit losses that materially impair the portfolio’s recovery path, particularly over shorter horizons. Stability is only one part of the equation. You also need liquidity.

In traditional portfolio construction, “conservative assets” are typically defined as fixed income, cash, or other instruments expected to preserve capital and provide reliable access to liquidity. This typically translates into reducing equity exposure and increasing allocations to these assets, with the expectation that this will lead to a more stable outcome. It can, but not always in a way that lasts. The underlying exposures remain tied to many of the same forces—growth, inflation, liquidity, and policy. When those forces shift, assets that are expected to offset one another can start to move together.

At that point, the distinction between how a portfolio is constructed and how it behaves becomes more relevant. Diversification at the asset class level can give a sense of balance, while the underlying exposures remain closely aligned. That alignment is not always visible until conditions begin to change.

Bonds, for example, are sensitive to interest rates. When rates rise, bond prices fall. Hedging may help address specific risks over defined periods, but it does not change the overall structure of the portfolio.

Ray Dalio has often framed diversification in terms of how different parts of a portfolio respond across economic environments. That perspective becomes more relevant as investors approach retirement, when the focus moves away from maximizing returns and toward maintaining consistency in how the portfolio behaves.

The Changing Role of Bonds

Bonds have traditionally anchored portfolios as investors approach retirement, providing income and, in many environments, helping to offset equity risk.

That relationship has been less reliable in recent years, particularly in inflation-driven regimes. Inflation, shifts in monetary policy, and tighter financial conditions have created periods where both equities and bonds have declined together. When that happens, the diversification investors expect from fixed income becomes less dependable.

Investors have started to reassess this dynamic. What was once taken as a given, that bonds would provide a consistent counterbalance to equities, acting as a structural hedge, is now more often treated as conditional based on the broader environment.

In some cases, hedging is used to reduce specific risks, such as equity downside or interest rate exposure. It can be effective for a period of time. But it is designed around defined risks, not the overall structure of the portfolio. It may help at the margin, but it can’t replace diversification.

Larry Fink has pointed to the pressure this creates for the traditional 60/40 framework, arguing that the classic stock-and-bond portfolio may no longer provide the diversification investors once expected. That framework was shaped by a period of falling rates, stable inflation, and ample liquidity, conditions that have been less consistent in recent years[2].

For investors nearing retirement, this shift changes how bond allocations are interpreted within the portfolio. Increasing exposure can still moderate volatility in certain environments, but it does not fully separate the portfolio from the broader forces influencing both asset classes. When those forces align, the expected diversification can weaken.

Diversification vs. Concentration, and How to Fix It

If increasing bond exposure does not fully separate a portfolio from the same underlying forces, it begs the question, how much diversification can you get through allocations alone? Shifting weights between equities and fixed income can change the profile of returns, but it does not necessarily introduce new drivers.

As a result, your focus turns to what sits beneath those allocations. Rather than focusing only on asset classes, investors are looking more closely at the sources of return and how they behave alongside one another.

This includes identifying exposures that are less dependent on broad market direction and less sensitive to the same set of conditions. Strategies driven by relative value, dispersion, or more idiosyncratic opportunities can respond differently from traditional assets, particularly when markets become more constrained.

The objective is not to move away from equities or fixed income, but to reduce reliance on any single set of drivers. When multiple parts of a portfolio respond to the same forces, diversification becomes less effective.

Introducing return streams that are not tied to those same forces may help reduce reliance on common risk drivers and create a more balanced outcome over time.

This is where uncorrelated sources of return can be considered. When they exhibit low and unstable correlation across market regimes, they may help offset periods when traditional assets move together, contributing to a more balanced pattern of returns over time. The extent of that benefit depends on how those strategies are constructed and how they behave under different conditions, particularly when market volatility increases. In that sense, de-risking becomes less about reallocating within a familiar framework and more about broadening the set of drivers within the portfolio. That shift does not eliminate risk, but it may help reduce reliance on any single environment to deliver the intended outcome.

Uncorrelated sources of return can take different forms, including relative value strategies, dispersion trades, and more idiosyncratic or event-driven approaches. The distinction lies less in the label and more in how the return is generated. For investors, the key considerations are whether the source of return exhibits low and unstable correlation to broad market direction, how consistently that independence holds across different environments, and how the strategy behaves during periods of drawdown. Attention is often placed on whether it can provide some degree of protection or resilience when traditional assets are under pressure, and whether it can contribute positively during those periods, rather than simply declining alongside the rest of the portfolio. To that end, the role of uncorrelated return streams is not to replace existing allocations, but to improve how the overall portfolio responds when the conditions in the market are less favorable. These characteristics are based on historical observations and may not persist in future market environments.

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David X Martin is the CEO and CIO of Arctium Capital Management. Connect with him on LinkedIn here.

Enrico Dallavecchia is the President and COO of Arctium Capital Management. Connect with him on LinkedIn here.

*Any views expressed in this article are those of the author(s) and do not necessarily represent those of EFSI.