Vanguard Says Don’t Give Up on the 60/40 Portfolio

Of all the choices an investor has to make, asset allocation could be the most important. Deciding how to split up the money you invest among different asset classes requires clarity of purpose and an understanding of each category’s advantages and disadvantages. For years, one of the most classic asset allocation models has been the 60/40 portfolio, wherein 60% of your assets went into stocks and 40% was put into bonds. In 2022, that type of portfolio took a serious beating, leading many to wonder if the 60/40 portfolio’s salad days were officially in the rearview mirror. Asset management firm Vanguard, though, thinks that the classic strategy could have some life left in it after all.

For help figuring out your own asset allocation strategy, consider working with a financial advisor.

60/40 Portfolio Basics

The 60/40 portfolio is pretty easy to understand, as the numbers are right there in the name – you invest 60% of your assets in equities such as stocks and the other 40% are put into fixed-income securities such as bonds.

One implementation of the 60/40 portfolio is to put 60% of your money into companies in the S&P 500 and 40% into U.S. Treasurys. You could also build a global 60/40 portfolio by investing in foreign companies and bonds.

There are numerous ways to build this type of portfolio. You can invest in individual companies and bonds if you choose, or you can simply split your money between various mutual funds and ETFs that invest a buffet of stocks and bonds for you.

60/40 Portfolio in 2022

As noted above, 2022 was an especially difficult year for the 60/40 portfolio. The average value of a 60/40 portfolio fell by 16%. It’s worth noting, though, that that came after a decade of fairly strong performance, with the 10-year average growth of 6.1% including that rough year in 2022.

“The past decade has been a strong run for the 60/40,” said Todd Schlanger, a senior investment strategist at Vanguard, in a statement. “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.”

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Vanguard’s 60/40 Outlook

All that said, Vanguard thinks that reports of the death of the 60/40 portfolio are exaggerated. Valuations of companies have gone down, meaning there is room for growth.

“With these more favorable valuations, 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.

As of the end of 2022, Vanguard expects the next decade to show an annualized return of 6.09%. By contrast, at the end of 2021 it’s forecast over ten years was annualized growth of 3.83%.

The Bottom Line

The 60/40 portfolio fared poorly in 2022, leading many to think the asset allocation template’s heyday was in the past. Vanguard, though, is projecting a rebound and strong returns over the next decade.

Investing Tips

• A financial advisor can help you figure out the ideal asset allocation for you and your family. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

• Use SmartAsset’s investment calculator to get a sense of what your investments could look like down the road.

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