For years, the rule of thumb for asset allocation has been to start with a baseline of 60% stocks and 40% bonds.
That gives investors something to work from. Younger investors, who have more time to ride out stock-market volatility, might want a higher stock weighting than 60%. Older investors looking for safety might want a higher bond weighting than 40%.
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The idea is that stocks will provide investors with stronger returns, and bond returns will compensate when stocks fall.
But last year both stocks and bonds tumbled, pushing the typical 60-40 portfolio down 16%, according to a Vanguard report.
“That has raised doubts about the viability of this strategy,” the report said. “But it helps to put this in perspective: The annualized return for the 10 years through 2022 was 6.1% for a globally diversified 60/40 portfolio.”
A Strong Decade for 60%-40% Portfolios
So maybe the 60-40 portfolio isn’t dead. “The past decade has been a strong run for the 60/40,” said 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.”
The 2022 slump sets up the next decade for a nice run, he said. “While 2022 may have been painful for investors, the result was that valuations for asset classes are now lower, and most are fairly valued,” Schlanger said.
To be sure, there’s a “notable exception: U.S. stocks, which are more reasonably priced now but still above what we consider to be the fair-value range,” he said.
Given the more favorable stock and bond valuations following last year’s rout, “Vanguard’s modeling shows that the return outlook and the worst-case risk scenario for the 60/40 portfolio have notably improved,” said Ziqi Tan, a Vanguard investment strategist.
60-40 Expected Return Rises to 6.09%
Vanguard’s expected annualized 10-year median return for 60-40 portfolios rose to 6.09% at the end of 2022 from 3.83% at the end of 2021. The probability of a 10% loss for the portfolio in any given year dropped to 39.5% from 59.5%.
Another source of support for the 60-40 portfolio: “While equities tend to gain much of the attention, more of the improvement in our projections stems from fixed income, with expected returns more than two times higher than they were going into 2022,” Schlanger said.
“Far from being dead, the 60/40 portfolio is poised for another strong decade.”
When it comes to investing, of course, there are no certainties. But the Vanguard argument certainly makes sense.
As for your own asset allocation, it should be dictated by your risk tolerance and return goals.
If you want to maximize your returns and can handle a lot of risk, you should generally tilt toward stocks. If you want less risk and can manage with lower returns, you should generally tilt toward bonds.
