Time to Rethink Diversification for the Decades Ahead

Over the past three decades, asset allocation models were optimized for an era defined by increased globalization, declining interest rates, as well as low and stable inflation. Equity-heavy portfolios were favored, with bonds acting as a reliable counterweight during periods of market stress. The assumptions underpinning legacy allocation models are looking dated. Macroeconomic and geopolitical shocks are changing how traditional asset classes behave, exposing portfolios still calibrated to the previous regime to structural misalignment with the risk outlook for the decades ahead. While equity–bond diversification provided reliable stability during the globalization era, its effectiveness has eroded in today’s more volatile macroenvironment.

Recent political and economic shifts have added new layers of complexity to portfolio construction. Rising protectionism and supply chain realignments are reshaping global trade flows, while evolving inflation dynamics and interest rate expectations have unsettled long-standing market patterns. At the same time, growing scrutiny of fiscal deficits across major economies has heightened sensitivity around sovereign debt markets and the role of reserve currencies. These developments are testing long-held assumptions about asset class behavior and correlations, introducing additional risk factors that investors must now weigh when assessing portfolio balance.

In this changed environment, real assets have the potential to provide a unique mix of income, inflation protection, and growth to provide a real return foundation for investors. Traditional portfolios centered around stocks and bonds often lack the potential for real returns in an uncertain macroenvironment. This underlines the need for investors to revisit how resilience is achieved within portfolios and reassess the roles that different asset classes play in absorbing macroeconomic and geopolitical shocks. The core components of strategic asset allocation may need to evolve accordingly.

Real assets—specifically, real estate and infrastructure—can offer a compelling foundation for portfolios. Unlike financial assets, they are grounded in real economic activity and are generally less negatively exposed to monetary tightening and inflation surprises, particularly among assets anchored by inflation-linked income and contracted cashflows.

These characteristics may make real assets a durable real return source and can be a complementary anchor with stocks and bonds in a holistic portfolio. With inflation-linked income, low historical correlation to traditional assets and critical economic utility, real assets provide structural diversification, not just tactical hedging. Infrastructure, in particular, has demonstrated resilience through recent volatility—outperforming many traditional assets during the inflation surge of 2022 and weathering pandemic-era disruption. Infrastructure’s ability to deliver essential services, secured by inflation-linked regulated or contracted cashflows, provides a counterweight to financial asset volatility that outperforms during inflationary periods.

Despite these strengths, even investors that have evolved beyond legacy asset allocation models remain structurally underallocated to real assets. Many institutional investors intellectually accept the case for increasing exposure—but most portfolios are yet to catch up with this updated strategic perspective. Real assets are still viewed as alternatives and remain constrained by liquidity bias, outdated capital models, and legacy portfolio frameworks which underweight real assets, despite its strategic relevance. CBRE IM estimates that real assets make up just ~11% of institutional portfolios globally—split roughly two-thirds real estate and one-third infrastructure. Current allocations are too small to deliver meaningful diversification or inflation protection. leaving portfolios overexposed to financial asset volatility and underprepared for structural macro shifts.

CBRE IM’s modeling shows that portfolios that increase allocations to real assets up to 30% are able to deliver better risk-adjusted returns, reduced left-tail risk and improved drawdown resilience. These outcomes derive from the intrinsic characteristics of real estate and infrastructure, rather than being dependent on market timing or short-term positioning. They offer tangible real-world utility in delivering essential services to society and usually product in supply constrained environments, which make them well-suited to volatile macro and geopolitical market regimes.

For most investors, increasing allocations to real assets will happen slowly, but the direction of travel is clear—real assets are foundational and no longer merely an alternative. A growing number of institutional investors are reframing portfolios around a more balanced model across the three major asset classes: equities, bonds and real assets. Portfolio diversification must be rebuilt from more resilient building blocks—based not on historical assumptions, but on tangible, forward-looking risk mitigation. For unlevered investors committing long-term capital, increasing their allocation to real assets can anchor a portfolio allowing for the capitalization of the dominant forward-looking global investment trends and mitigation of portfolio risks. The most urgent priority for all asset allocators is to thoughtfully optimize portfolio construction for the decades ahead.