3 Misconceptions About 60/40 Portfolios: Vanguard

What You Need to Know

The 60/40 portfolio isn’t for everyone.
U.S. stocks and bonds aren’t the only assets that can go into a 60/40 portfolio.
Investors should periodically check their portfolios, even those holding only one fund.

The long-popular 60/40 portfolio — 60% stocks and 40% bonds — took a drubbing along with the overall financial markets in 2022, generating doubts among investment pros over its future viability.

As the stock market has rallied this year, the 60/40 portfolio appears to face a better prognosis, as Vanguard Group noted earlier this year in a commentary that said the allocation had a solid decade even when taking 2022 into account. The outlook for 60/40 improved after the portfolio’s big decline last year, the investment giant noted.

Investor questions about the 60/40 portfolio after Vanguard published that view “made it clear that there are many misconceptions surrounding this tried-and-true investment standby,” the company said in a post this week.

“The misconceptions seem to fall into three broad themes,” Todd Schlanger, a Vanguard senior investment strategist, said in the post. “Two of them deal with execution, but one is fundamental — basically defining what 60/40 is.”

Vanguard sought to clear up three major misconceptions in its post:

1. The 60/40 is a balanced-portfolio proxy, not one-size-fits-all.

“The 60/40 is that middle-of-the-road portfolio that reflects the typical investor’s asset allocation, so it’s often used as an example in industry research,” Schlanger said. “It’s a good proxy because many institutions have historically used this allocation to meet their objectives.” And the average asset allocation for the most popular products for individual investors, like target-date funds, is around 60/40, he noted.

The 60/40 allocation, however, isn’t necessarily any better than a 40/60 or 90/10 portfolio for investors seeking a more conservative or aggressive portfolio, Schlanger said.

“In other words, 60/40 is not the best choice for the average 20-something with a 60- or 70-year time horizon,” he said. “They would likely benefit from more equities to grow their portfolio over the long run.”

Investors need portfolios tailored to their needs, Schlanger said.

2. There’s more than one 60/40 flavor.

The typical 60/40 portfolio used to encompass U.S. stocks and bonds only, but the strategy has evolved to include other asset classes, including non-U.S. securities, Schlanger noted. Advisors and clients also have room to customize.

Alternative investments, including commodities and private equity, can enhance a portfolio’s risk-return profile but they’re not for everyone, “and you have to weigh the potential benefits against the typically higher costs, complexity and illiquidity associated with some of those assets,” Schlanger said.

He cited one approach: investing most retirement money in core asset classes and modestly overweighting certain sectors or actively managed funds that could add value over the long term.

Vanguard Wellington Fund takes this approach, though its actual asset allocation is closer to 65/35, according to the post. The fund tilts toward value stocks and corporate bonds, aiming to add “incremental alpha over time.”

3. Don’t “set it and forget it” with the 60/40 mix.

Using a single fund is the simplest way to hold a 60/40 portfolio because the portfolio manager will handle rebalancing, according to Vanguard. But investors with multiple funds in their portfolio need to make sure the allocation remains appropriate over time, and that may even be the case for those holding only one fund, the firm said.

Investors should periodically revisit their portfolios, Schlanger said, so they can reassess their situation to see whether the asset allocation works now and take on a new allocation if it doesn’t. When appropriate, they also should rebalance the portfolio back to its target allocation, he said.

Without rebalancing, equities may represent larger portfolio share over time, so rebalancing reduces volatility by their allocation constant, Vanguard noted, adding that rebalancing annually is probably adequate for most investors.