Enduring appeal of the 60-40 portfolio
In this webcast excerpt, Vanguard CEO Tim Buckley discusses the poor performance of the financial markets in 2022 and the long-term prospects of the "60-40 portfolio." The hypothetical mix of 60% stocks and 40% bonds serves as a bellwether of market performance, and many advisors and investors use it as a starting point in portfolio construction.
Tim Buckley: That 60/40 portfolio, the return prospects for it just got better. In fact, I've been doing this webcast for a decade now, and the returns are probably second best that we've seen in that time. So if you look forward to say the expected return on a 60/40 portfolio, you don't want to sell it now.
And so let me go into why. Stocks and bonds, as you know, Massy, they don't love rising rate environments for the most part. And they have to reprice. It was the speed with which it happened that surprised everyone and shocked the markets and why everything tumbled.
Early January last year, we were at a market high. Expectations, I don't know if you remember this, expectations for where the Fed would end with short-term rates—75 basis points, 75. Well, yeah, they went up 75, and they did that another three times. You had four 75s, you had two 50s, and a 25 in there. So you end up at a level that’s six times what the market expected, so that was shocking to both stocks and bonds; and that’s where you felt that pain.
But 60/40’s been through rising rates before. It’s been through declining rates.
When you look out ten years, you could expect about a 6 to 7% return from that portfolio. So, at a 7%, you're doubling your assets in about ten years.
Learn more about strategic asset allocation
- Available on demand: “A Look Ahead with Vanguard” (44:53 video, full replay of January 10, 2023, webcast)
- Can investors count on stock-bond diversification? (article, issued October 2021)
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Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer's ability to make payments.
Asset class return projections are based on Vanguard Capital Markets Model (VCMM) projections.
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 modeled asset class. Simulations as of September 30, 2022. Results from the model may vary with each use and over time.
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