What You Need to Know
- The allocation has done well by investors over the long term despite weak performance in 2022, Fran Kinniry says.
- Other mixes, even 20-80, can be the right balance in the right situation.
- Historically, a small percentage of stocks have generated most U.S. market returns.
The long-popular 60% stocks-40% bonds portfolio remains alive and well and has proved to be successful despite a rough 2022, according to a key Vanguard Group researcher.
When both stocks and bonds tanked in 2022, many analysts pronounced the traditional balanced portfolio dead. But the 60-40 did well in 2023, returning 18% as the market roared back, Morningstar noted recently.
Fran Kinniry, who heads the Vanguard Investment Advisory Research Center, said in a recent interview that last year’s “staggering” return followed a 2022 in which the 60-40 portfolio logged its fifth-worst result.
“So the irony of all that is if you even look at the 3-year, 5-year, 10-year, the 60-40 was never dead,” Kinniry said.“I think people misunderstood that because it did have a bad year in 2022. But even if you look back without last year and look at the long-run return, 3-year, 5-year, 10-year, you would have been well-served owning a balanced portfolio.”
Not that the portfolio must be split along the 60-40 lines, he added.
“I think the danger also is just saying 60-40 because 60-40 is just one asset allocation. That’s not the right asset allocation for all investors,” Kinniry said.
Different Clients, Difference Balancing
Many allocations serve many purposes.
“There’s nothing wrong with 70-30. There’s nothing wrong with 80-20. There’s nothing wrong with 20-80,” Kinniry said. “It really should all go back to what are your clients’ goals, their objectives, their risk tolerance, their time horizon.”
The 60-40 mix, he added, “gets thrown around as if it’s the only portfolio. What we really need to say and what most people should say is a broadly diversified portfolio that rebalances (and is) low cost and stays the course. Whether that’s 20-80 or 80-20, it doesn’t matter.”
A 20-80 portfolio is “a perfectly good portfolio” for a retired 70- or 80-year-old, Kinniry explained. “And on the other end, a young investor who’s just graduated from college, 60-40 would be too conservative. I think we have to always kind of take the 60-40 with a grain of salt. It really is just one allocation among hundreds of allocations.”
Rather than trying to guess what will happen in a given year, advisors should focus on their clients’ goals, time horizons and risk tolerances, formulate an asset allocation and rebalance to that, Kinniry suggested, a recommendation that reflects Vanguard’s stay-the-course philosophy.
If investors had drawn conclusions from market performance in the first 10 months last year, “it probably would have been very detrimental,” he said.
Kinniry cited the pitfalls in trying to time the market and warned about the risks involved in underweighting specific stocks— for client portfolios and advisors’ practices.
Research shows that in the long term, it’s hard for active fund managers to beat indexing, “and if that is true, why would it be easy to guess what next year’s return is going to be? It’s not easy. History shows it’s wrong way more than correct. And if you’re an advisor, you really run the risk of getting fired by your client if you guess wrong,” he explained.
FAQs
“So the irony of all that is if you even look at the 3-year, 5-year, 10-year, the 60-40 was never dead,” Kinniry said. “I think people misunderstood that because it did have a bad year in 2022.
Is the 60 40 portfolio alive and well? ›
Given today's starting point, bonds are back as an income producer and an attractive asset class. And equity markets have reasonable valuations through a long-term lens. Because of that, not only is the 60-40 portfolio relevant, but it's also alive and well.
Why is the 40 60 balanced portfolio being challenged? ›
This diversification dynamic has been challenged by present market conditions. Stocks and bonds tend to bear a low or negative correlation during low inflation periods. In 2022, inflation and rising interest rates turned this relationship on its head and the 60/40 portfolio had its worst year since at least 1937.
Who invented the 60 40 portfolio? ›
Developed in 1952 by Nobel prize-winning economist Harry Markowitz, Modern Portfolio Theory suggests that “investors can construct portfolios to maximize expected returns based on a given level of market risk.” This led to the birth of the 60/40 portfolio.
Can Vanguard go bust? ›
In the unlikely event that we become insolvent, your money and investments would be returned to you as quickly as possible, or transferred to another provider.
What is the average return on a 60/40 portfolio? ›
As a result, 60/40 returned 17.2%, far above its historical annual median return of +7.8%. In 2022, central banks raised interest rates to tame the highest inflation rate in 40 years amid the tightest labor market in 50 years. This was the most aggressive rate-hiking cycle since the Paul Volcker era in the early 1980s.
At what age should you have a 60 40 portfolio? ›
20s and 30s: 90% to 100% stocks; 0% to 10% bonds. 40s: 60% to 70% stocks; 30% to 40% bonds. 50s and 60s: 50% to 60% stocks; 40% to 50% bonds. 70s: 30% to 50% stocks; 40% to 60% bonds.
Why does 60/40 no longer work? ›
In 2022, as the pace of inflation and rising interest rates quickened, the traditional correlation between equities and bonds turned positive, which became a big negative for investors. A Bloomberg index tracking a 60/40 mix was down 17 per cent in 2022.
What is better than the 60 40 portfolio? ›
There, he predicted that a 60/40 portfolio was only projected to grow by a rate of 2.2% per year into the future and that those who wished to become adequately diversified will need to explore other alternatives such as private equity, venture capital, hedge funds, timber, collectibles, and precious metals.
What is the best portfolio balance by age? ›
The common rule of asset allocation by age is that you should hold a percentage of stocks that is equal to 100 minus your age. So if you're 40, you should hold 60% of your portfolio in stocks. Since life expectancy is growing, changing that rule to 110 minus your age or 120 minus your age may be more appropriate.
Vanguard's research paper on this subject suggests that, for most investors, rebalancing on an annual basis is adequate. “Whether it's 60/40 or another asset allocation, rebalancing will help make sure your portfolio is consistent with your risk tolerance,” Schlanger said.
What is the 6040 rule? ›
But, the most successful entrepreneurs practice the 60/40 rule in every interaction. The rule is simple — in any conversation, as the person who is conceptualizing, developing, selling or optimizing an idea, you should listen at least 60% of the time; and talk no more than 40% of the time.
Does Vanguard have a 60/40 fund? ›
Vanguard 60% Stock/40% Bond Portfolio | Vanguard.
Is 80/20 better than 60/40? ›
Which Mix Is Right for You? If you're a younger investor with a long time horizon and are comfortable taking on more risk, the 80/20 portfolio may be a good fit. However, if you're closer to retirement or prefer a more conservative approach, the 60/40 portfolio may be a better option.
What is the average return on a portfolio? ›
The average return is the simple mathematical average of a series of returns generated over a specified period of time. The average return can help measure the past performance of a security or portfolio. The average return is not the same as an annualized return, as it ignores compounding.
What is the outlook for Vanguard 60 40? ›
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. “The past decade has been a strong run for the 60/40,” said Todd Schlanger, a senior investment strategist at Vanguard.
Are 60 40 portfolios facing worst returns in 100 years? ›
LONDON, Oct 14 (Reuters) - Investors with classic "60/40" portfolios are facing the worst returns this year for a century, BofA Global Research said in a note on Friday, noting that bond markets continue to see huge outflows.
Is Vanguard financially stable? ›
About Vanguard
Vanguard's mission is to "take a stand for all investors, to treat them fairly, and to give them the best chance for investment success."6 It prides itself on its stability, transparency, low costs, and risk management.
What is the Vanguard forecast for 2024? ›
Vanguard forecasts a year-end 2024 cash rate of 3.85% (down from the current 4.35%), and that the rate will eventually settle in the 3%–4% range, in line with our assessment of the neutral rate, the theoretical rate that would neither stimulate nor restrict an economy.
