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January 06, 2023 at 02:57 PM
What You Need to Know
- Vanguard likes the long-term 60/40 portfolio view, although its own model suggests 50/50 stocks and bonds.
The drubbing that the traditional 60% stock, 40% bond allocation took in 2022 doesn’t mean investors should abandon a balanced portfolio strategy, Vanguard analysts suggested recently.
“A balanced portfolio still offers the best chance of success,” Roger Aliaga-Diaz, portfolio construction head for the mutual fund giant, and his team said in a recent note.
Notable in last year’s global sell-off in stocks and bonds “was the degree to which both fell together,” Aliaga-Diaz wrote. The two asset classes’ long-standing negative correlation, in which returns moved in opposite directions, gave way in 2022 as stocks and bonds both sold off sharply.
This breakdown “was disconcerting for many investors and led some to question whether the 60% stock/40% bond portfolio still had merit as an investment tool,” Aliaga-Diaz wrote. Longer term, however, the data support balanced portfolios, he suggested.
Rising equity valuations in 2021 pushed realized returns on the 60/40 portfolio well above Vanguard’s forecasted range from 10 years earlier, while large losses in both equity and fixed income over the last 12 months brought those returns more in line with the firm’s long-term view.
“Our research finds that correlations can move aggressively over shorter investment horizons but that it would take long periods of consistently high inflation for long-term correlation measures — those that more meaningfully affect portfolio outcomes — to turn positive,” the report said.
Vanguard’s long-term outlook for global stocks and bonds has now reversed its downward trend, with the higher return forecast largely driven by asset price declines that resulted from central bankers’ interest rate increases, according to the note.
