Bank of America is warning its clients that the traditional balanced investing model isn’t working in 2026. The safe and consistent 60/40 portfolio, which allocates 60% toward stocks and 40% in bonds, is putting on a lackluster performance this year, the bank wrote in a Wednesday note. That’s because amid both inflationary and stagflationary worries — especially as the Iran war pushes oil prices higher — stocks and bonds are moving in the same direction. This correlation undermines the value of the portfolio model, which is designed to insulate investors from sharp swings in either bond prices or equities as they typically move in opposite directions. The iShares Core 60/40 Balanced Allocation ETF (AOR) is up less than 1% year to date, while the S & P 500 is down roughly 1%. Strategist Jared Woodard said most 60/40 models are incurring losses in 2026 when accounting for inflation. AOR YTD mountain The iShares Core 60/40 Balanced Allocation ETF (AOR) year-to-date chart. “The indexes have never been so undiversified,” Woodard wrote. “This is why we view real-economy assets as essential. Bond/equity correlation is positive and major benchmarks are less diversified than ever.” The bank recommended other ways to diversify portfolios while the 60/40 model struggles. One of those suggestions includes adding income-generating emerging markets ETFs. Woodard noted emerging markets dividend stocks are paying 4% yields while outperforming their U.S. counterparts over the last three years. He called out the State Street SPDR S & P Emerging Markets Dividend ETF (EDIV) and the iShares JPMorgan EM High Yield Bond ETF (EMHY) . The bank also recommends international small-cap value stocks, noting the Avantis International Small Cap Value ETF (AVDV) has nearly doubled over the last five years. “The group offers steady outperformance, better valuations, and low correlation, with favorable exposure to Japan and reduced exposure to Europe,” Woodard wrote. Bank of America believes small and midcap industrial names are set to be big winners in a new artificial intelligence-driven industrial cycle. The bank also highlighted the Harbor Commodity All Weather Strategy ETF (HGER) , which has a quarterly rebalance based on inflation and market moves. “The strategy has returned over double that of a traditional 60/40 portfolio, while offering low correlations to both equities and fixed income,” Woodard wrote. —CNBC’s Michael Bloom contributed reporting.