July 27, 2023
Even after a brutal 2022, Vanguard strategists don't see a reason to ditch the tried-and-true 60/40 portfolio mix. In fact, they think a decade of strong returns awaits investors who opt for the classic mix of stocks and bonds.
A portfolio that held 60% stocks and 40% bonds took a loss of about 16% last year, which raised doubts about whether the strategy could remain viable in an age of painful volatility and heightened macro risks. But pushing the timeframe out a full decade, the classic portfolio composition retains its promise of steady returns for investors.
"The past decade has been a strong run for the 60/40," according to Todd Schlanger, a senior investment strategist at Vanguard. "If you look at the nine years prior to 2022, a globally diversified portfolio posted a lofty 8.9% annualized return, despite the low interest rate environment. It was on track for a 92nd percentile outcome based on our projections. Even after taking 2022 into account, the 10-year return beat expectations at the 63rd percentile."
A difficult 2022 brought stock valuations lower and closer to fair value, in Vanguard's view. That makes the classic balance look even more attractive, and even the worst-case risk scenario has improved in 2023.
Not only that, but the dual shock of steep inflation and historic rate hikes were in part a consequence of the pandemic, and those events aren't likely to repeat in the years ahead. Vanguard's Capital Market Model projects the median expected annualized return for the traditional balance to hover in the 5%-6% range for the next 10 years.
In any case, Vanguard noted that several misconceptions about the strategy remain.
For starters, the 60/40 approach shouldn't be considered a one-size-fits-all, but more of a proxy for balance.
"But that's not to say that 60/40 is any better than a 40/60 or 90/10 portfolio for investors who need a more conservative or more aggressive portfolio for their goals, time horizon, and risk tolerance," Schlanger said, adding that the needs of a young adult differ from those of someone older. "It's a good starting place, but an investor will need to tailor a portfolio to their needs."
It's worth noting, too, Schlanger said, that non-US assets and alternative investments like commodities and private equity could be worth consideration, because there's no one way to implement the 60/40 balance.
Finally, the strategist said it's important not to adopt a "set it and forget it" approach, but instead revisit and reassess periodically.
"Life happens, things change," he said. "Your financial situation and goals may have evolved since you first selected that target asset allocation years or decades ago. There's nothing wrong with changing your investment strategy, as long as it's driven by careful consideration, not by market noise."
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