Despite a challenging 2022, the 60/40 portfolio has proven its mettle as a reliable long-term investment strategy and continues to be a wise choice for clients, according to Vanguard.
The strategy, which allocates 60 per cent of assets to stocks and 40 per cent to bonds, saw declines of some 16 per cent in 2022, raising doubts about its viability in portfolios.
However, in a recent market note, Vanguard pointed out a global 60/40 portfolio has since staged a recovery, with a 29.7 per cent cumulative return from year-end 2022 to the end of September 2024.
The strategy also remains positive in the long term, with the 10-year trailing annualised return standing at 6.9 per cent over the past decade, 10 basis points above its long-term average.
“Falling equity valuations and rising bond yields have given way to an improved return outlook,” Vanguard observed.
“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.”
Todd Schlanger, senior investment strategist at Vanguard, highlighted the 60/40 strategy has remained “consistently strong” despite occasional slumps when both stocks and bonds notched declines. In the past, the strategy also saw significant movements, with returns ranging from 37 per cent to -30 per cent during the GFC.
However, 10-year returns have proven “much more stable”, suggesting the strategy can prove effective in navigating such fluctuations in the long term.
“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,” Schlanger said.
In particular, the fund manager highlighted diversification as a key driver for this 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 relative to the various segments of the global capital markets,” it said.
“Even in its worst years of absolute returns, such as 2022, the 60/40 portfolio 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.”
In light of such “steady as it goes” results from a globally diversified balanced portfolio, Vanguard cautioned against getting caught up in short-term market noise.
“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,” it said.
