The 60/40 portfolio can be a wise choice for clients with a moderate risk tolerance.
Senior Investment Strategist, Vanguard
A globally diversified portfolio of 60% stocks and 40% bonds declined about 16% in 2022—a painful period for multi-asset investors that raised doubts about the viability of this strategy1. Some commentators even declared that the traditional 60/40 balanced approach, the old standby, was dead.
Fast-forward to September 2024: The global 60/40 portfolio is back in positive territory, with a 29.7% cumulative return since year-end 20222. Even accounting for 2022, the 10-year trailing annualised return of the 60/40 portfolio was 6.9% over the past decade, roughly in line with its long-term average3.
Falling equity valuations and rising bond yields during 2022 have given way to an improved return outlook for diversified 60/40 portfolios. While strong equity returns had an outsized impact on the 60/40 portfolio over the last decade and have driven valuations back to high levels, we expect to see more proportional contributions from each asset class over the next 10 years.
The long-term track record of the 60/40 portfolio has been consistently strong. Though unusual, it’s not unprecedented to see stocks and bonds decline in tandem. Even so, the 60/40 portfolio can be a wise choice for clients with a moderate risk tolerance seeking broad diversification and a track record of solid long-term results.
The strength of the 60/40 approach can be seen in the chart below, which plots the portfolio’s 10-year rolling returns dating back to 1997. While the strategy has had its good and bad years—returns ranged from +37% to –30% during the global financial crisis of 2007-2008—the 10-year returns have been much more stable. While our findings are in US dollar terms, we believe they remain relevant for global investors given the portfolio’s global diversification.
Returns of the 60/40 portfolio over time
Note: For information about the proxies used in the globally diversified 60/40 portfolio, please see index descriptions in footnote 1.
Source: Vanguard calculations, based on data from Standard & Poor’s, MSCI, and Bloomberg. Returns calculated in USD.
Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
To further quantify this, we ranked the historical periods by percentile and identified the interquartile range (the 25th and 75th percentiles). Since 1997, the interquartile range of 10-year returns remained relatively tight around its 6.8% average annualised return at 5.6% to 7.6%.
Diversification drives the 60/40 portfolio’s long-term consistency. By design and due to the global broad market exposure that yields diversification across and within asset classes, the strategy’s yearly performance is usually near the middle of ranked returns relative to the various segments of the global capital markets, as shown in the next chart, which uses the Vanguard LifeStrategy 60% Equity Fund as a proxy for the 60/40 portfolio.
Even in its worst years of absolute returns, such as 2022, the 60% LifeStrategy portfolio’s rank relative to slices of the global capital markets was, predictably, about average. It is the relative consistency of these yearly returns over time that compounds into this competitive long-term track record.
Key equity, bond and cash index returns, alongside the LifeStrategy 60% Equity Fund
Past performance is not a reliable indicator of future results.
Source: Vanguard calculations, data from 1 January 2014 to 31 December 2023, using data from Bloomberg, Thomson Reuters Datastream and FactSet. Global equities represented by the FTSE All-World Index, North American equities by the FTSE World North America Index, Emerging market equities by the FTSE All-World Emerging Index, Developed Asia equities by the FTSE All World Developed Asia Pacific Index, European equities by the FTSE All World Europe ex-UK Index, UK equities by the FTSE All-Share Index, UK government bonds by the Bloomberg Sterling Gilt Index, UK index-linked government bonds by the Bloomberg UK Govt Inflation-Linked UK Index, UK investment-grade bonds by the Bloomberg Sterling Aggregate Non-Gilts – Corporate Index, Global bonds (hedged) by the Bloomberg Global Aggregate Index (hedged in GBP) and cash returns represented by the Sterling Overnight Index Average (SONIA). Performance shown is cumulative and denominated in GBP. It includes the reinvestment of all dividends and any capital gains distributions. The performance data does not take account of the commissions and costs incurred in the issue and redemption of shares. Basis of fund performance NAV to NAV.
Another important aspect of the 60/40 portfolio’s consistency has been its performance relative to our expectations in the Vanguard Capital Markets Model (VCMM). In the next chart, we plotted the interquartile range of expected returns from the VCMM dating back to 2014. The expected range of returns declined steadily as equities soared, but that all changed in 2022 when rising bond yields more than doubled the outlook for fixed income returns.
The actual performance of the 60/40 portfolio was also remarkably steady, falling within the interquartile range of our forecast the majority of the time. So, if anything, the 60/40 portfolio has been more consistent than one might expect. Diversification again was key to these results.
60/40 portfolio returns are now more in line with our view based on data available 10 years ago
Past performance is not a reliable indicator of future results. Any projections should be regarded as hypothetical in nature and do not reflect or guarantee future results.
Source: Refinitiv as at 31 July 2024 and Vanguard calculations in GBP. Notes: This chart shows the actual 10-year annualised return of a 60/40 portfolio in GBP compared with the VCMM forecast made based on data available 10 years earlier. For example, the June 2014 data at the beginning of the chart show the actual return for the 10-year period between 30 June 2004 and 30 June 2014 (red line) compared with the 10-year return forecast made on 30 June 2004 (green line). After June 2024, the green line is extended to show how our forecasts made between 30 September 2014 and 30 June 2024 (ending between 30 September 2024 and 30 June 2034) are evolving. The interquartile range (green shaded area) represents the area between the 25th and 75th percentile of the return distribution
IMPORTANT: The projections and other information generated by the VCMM regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Distribution of return outcomes from VCMM are derived from 10,000 simulations for each modelled asset class. Simulations are every quarter, between 30 June 2004 and 30 June 2024. Results from the model may vary with each use and over time.
It’s easy to get caught up in the noise and year-to-year absolute returns. That is why we encourage our clients to focus on what they can control—their goals, asset allocation, costs and discipline in implementing their investment strategy.
The strategic asset allocation and ‘steady as she goes’ results of a globally diversified balanced portfolio are a great starting place for long-term investors and that is as true today as any time in history. The 60/40 portfolio has been a remarkably consistent performer over the long-term and, with the tailwind of higher bond yields and a more balanced outlook, we see it as poised for another strong decade of results.
1 Vanguard calculations, based on data from Standard & Poor’s, MSCI, and Bloomberg, for the period from 1 January 2022 until 31 December 2022 in US dollar terms. For the globally diversified 60/40 portfolio, we used the following proxies: for US stocks, a 36% weighting in the CRSP US Total Market Index; for non-US stocks, a 24% weighting in the FTSE Global All Cap ex US Index; for US bonds, a 28% weighting in the Bloomberg U.S. Aggregate Float Adjusted Bond Index; and for non-US bonds, a 12% weighting in the Bloomberg Global Aggregate Float Adjusted ex-USD Index. Past performance is not a guarantee of future results. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
2 Vanguard calculations, based on data from Standard & Poor’s, MSCI, and Bloomberg, for the period from 30 December 2022, to 30 September 2024 in US dollar terms. For information about the proxies used in the globally diversified 60/40 portfolio, see footnote 1. Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
3 Vanguard calculations, based on data from Standard & Poor’s, MSCI and Bloomberg, for the period from 1 January 1997 until 30 September 2024 in US dollar terms. For the globally diversified 60/40 portfolio, we used the following proxies: for US stocks, a 36% weighting in the Dow Jones U.S. Total Stock Market Index (formerly known as the Dow Jones Wilshire 5000 Index) until 22 April 2005, the MSCI US Broad Market Index through June 2, 2013, and the CRSP US Total Market Index thereafter; for non-US stocks, a 24% weighting in the Total International Composite Index until 31 August 2006, the MSCI EAFE + Emerging Markets Index until 15 December 2010, the MSCI ACWI ex USA IMI Index until 2 June 2013, and the FTSE Global All Cap ex US Index thereafter; for US bonds, a 28% weighting in the Bloomberg U.S. Aggregate Float Adjusted Bond Index; and for non-US bonds, a 12% weighting in the Bloomberg Global Aggregate Float Adjusted ex-USD Index. Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
IMPORTANT: The projections or other information generated by the Vanguard Capital Markets Model® regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. VCMM results will vary with each use and over time. The VCMM projections are based on a statistical analysis of historical data. Future returns may behave differently from the historical patterns captured in the VCMM. More important, the VCMM may be underestimating extreme negative scenarios unobserved in the historical period on which the model estimation is based.
The Vanguard Capital Markets Model® is a proprietary financial simulation tool developed and maintained by Vanguard’s primary investment research and advice teams. The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include US and international equity markets, several maturities of the U.S. Treasury and corporate fixed income markets, international fixed income markets, US money markets, commodities, and certain alternative investment strategies. The theoretical and empirical foundation for the Vanguard Capital Markets Model is that the returns of various asset classes reflect the compensation investors require for bearing different types of systematic risk (beta). At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly financial and economic data from as early as 1960. Using a system of estimated equations, the model then applies a Monte Carlo simulation method to project the estimated interrelationships among risk factors and asset classes as well as uncertainty and randomness over time. The model generates a large set of simulated outcomes for each asset class over several time horizons. Forecasts are obtained by computing measures of central tendency in these simulations. Results produced by the tool will vary with each use and over time.
The primary value of the VCMM is in its application to analysing potential client portfolios. VCMM asset-class forecasts—comprising distributions of expected returns, volatilities, and correlations—are key to the evaluation of potential downside risks, various risk–return trade-offs, and the diversification benefits of various asset classes. Although central tendencies are generated in any return distribution, Vanguard stresses that focusing on the full range of potential outcomes for the assets considered, such as the data presented in this paper, is the most effective way to use VCMM output.
The VCMM seeks to represent the uncertainty in the forecast by generating a wide range of potential outcomes. It is important to recognise that the VCMM does not impose “normality” on the return distributions, but rather is influenced by the so-called fat tails and skewness in the empirical distribution of modeled asset-class returns. Within the range of outcomes, individual experiences can be quite different, underscoring the varied nature of potential future paths. Indeed, this is a key reason why we approach asset-return outlooks in a distributional framework.
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