Changing market circumstances require a new look at the traditional 60% equities and 40% bonds portfolios that have been the staple of portfolio makeups in the past, according to Lee Freitag of Northern Trust Asset Management.

More diversification is advisable for equities and a fresh view of interest rate risk is needed in order to achieve yields that are needed, particularly for new retirees, Freitag, practice lead of retirement solutions at the Chicago-based firm, said in an interview today.

“U.S. equities have had strong returns over the last 10 years, but returns are likely to be lower for the next 10 years,” he said. Likewise, “aggregate bonds have provided strong yield with low risk in the past, but we have entered an environment of interest rate risk” because of the continuing low rates.

For equities, investors may want to consider diversifying beyond U.S. equities to global equities from developed countries and even some emerging markets, Freitag said. Global real estate, globally listed infrastructure and natural resources such as oil and gas are assets advisors may want to steer clients toward, he said, “because these assets have different cycles. A new retiree may be looking at 30 years of retirement” and need assets that pay returns over a long period of different business cycles. “Modern diversification means more than traditional equities.Investors will want to diversify over a broader array of assets.

“For fixed income, we are anticipating lower rates for longer, but investors have to ask themselves what kind of risk they are willing to take on to gain higher yields,” he added. “Investors may want to consider mortgage backed securities or longer debt where they know what the returns will be.”

Earlier this year, Northern Trust produced two reports dealing with the challenges of the traditional 60/40 portfoli: “Equity Designed with Retirement in Mind” and “What to do with the 40: Managing Interest Rate Risk in Fixed Income.”

In the equity report, Northern Trust said stock returns should average 4.7% annually over the next five years, versus the 10.8% average growth of the last five years, which “is a significant drop that may cause investors to re-evaluate how they can achieve their retirement goals.”

The fixed-income report added, “Delivering consistent income is becoming more difficult with increasing market volatility, expectations for lower returns across asset classes and lower bond yields. The traditional approach of adding more fixed income into the portfolio mix to generate income is no longer as effective and comes with unintentional risks. Looking ahead, it’s important to consider the incorporation of additional asset classes to help diversify the sources of income generation and portfolio risk on the road to consistent and persistent retirement income.”

To deal with these challenges, Freitag said, “Advisors will have to consider the goals of their clients [and the fact that] their older clients may have more access to stable sources of retirement income than future and new retirees. Portfolios for the future [for those nearing retirement] will look different depending on the levels of guaranteed income the clients have. Diversification will matter more” in the future.