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Markets and economy

Enduring appeal of the 60-40 portfolio

In this excerpt from a January 10, 2023, webcast, Vanguard’s CEO talks about a bellwether asset mix.
3 minute watch
March 24, 2023
Markets and economy
Market & economy insights
Vanguard news
Asset mix

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

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All investing is subject to risk, including the possible loss of the money you invest. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss.

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.

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 U.S. and international equity markets, several maturities of the U.S. Treasury and corporate fixed income markets, international fixed income markets, U.S. 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.