Does the ‘Plain Vanilla’ 60/40 Portfolio Really Need More Flavor?

In more than 83% of the rolling 10-year periods dating to 1976, a U.S. 60/40 portfolio generated better risk-adjusted returns than an all-stock benchmark, Morningstar reported.

The 60/40 portfolio also outperformed a more diversified version in every rolling 10-year period going back 20 years, the firm found.

Even with that track record, however, it may make sense for clients to add some international flavor, one Morningstar researcher suggests.

Time for Something Else?

The U.S. 60/40 has had “a really great run. It was only really this year we started to see international stocks start to outperform. And it's hard to say how long that will continue,” Jason Kephart, senior principal, multi-asset strategy ratings at Morningstar and a report author, said last week.

“But I do think in general, when people think about the 60/40, they probably should be diversified beyond just the U.S,” he said.

While that diversification wouldn’t have worked out as well as a basic U.S. balanced portfolio over the past decade, “the market environment we've seen this year really is a great reminder of why you want to have a diversified portfolio in the first place,” Kephart said.

“You really just can't predict when things are going to change,” and just because U.S. growth stocks had such a great run from 2010 through 2024, “you just don't know when that tide's gonna shift,” he said. “The best defense against the unknown is diversification and having some international stocks. I think every portfolio, you should probably have some.”

Shifting Environments

Morningstar research shows that when interest rates rise or inflation comes in above average, Treasurys and other high-quality bonds would likely be less reliable diversifiers.

“The major shifts in U.S. tariff policy announced in April 2025 have also added massive levels of uncertainty to the investment landscape, potentially upending many previously established performance patterns,” Morningstar found.

The correlation between assets, like stocks and bonds, can shift over time, the firm notes: “Moreover, correlations between many assets spike during periods of market crisis — in other words, exactly when you need diversification the most.”

Vanilla’s Powerful Record

To test diversification, Morningstar created a portfolio with 11 asset classes, allocating 20% to larger-cap domestic stocks, 10% each to developed and emerging market stocks, Treasurys, U.S. core bonds, global bonds and high-yield bonds; and 5% each to U.S. small-cap stocks, commodities, gold and real estate investment trusts.

“Portfolio diversification didn't boost returns in 2024's generally bullish market environment. As U.S. stocks notched another year of 20%-plus returns, most other asset classes — except for bitcoin and gold — fell behind,” the researchers found.

Nearly every “diversified” asset class in 2024 lagged the benchmark all-stock Morningstar U.S. Market Index, which achieved a 24% return. That led the 15% gain for the 60/40 portfolio, 10.05% for the more diversified portfolio and 1.36% for the Morningstar U.S. Bond Index.

Is It Enough Now?

Morningstar identified a key question in the current environment.

"Will a plain-vanilla stock and bond blend continue to dominate, or can a more diversified approach add value? The answer depends largely on the macro environment, which went through a significant shift starting in late 2021,” according to the research firm.

“In contrast to the low inflation and generally declining interest rates that defined most of the previous three decades, both inflation and interest rates have reversed course. As a result, correlations between stocks and bonds have remained positive since 2021, reducing the benefit of basic portfolio diversification,” the report said.

Positive stock/bond correlations — in which the two asset classes move together rather than in opposite directions — would probably persist during a long stretch of higher interest rates or inflation, the researchers note. Even in that situation, Treasurys and other high-quality bonds can improve risk-adjusted returns when added to an all-stock portfolio, they say.

“The upshot: Investors looking to build diversified portfolios don't necessarily need to venture too far beyond the basic mix of larger-cap stocks and high-quality bonds.”

Some venturing may be in order, though. How far to diversify, and where, are key questions.

Adding international exposure is one of the first steps toward a diversified portfolio, and even minimalist investors usually include non-U.S. stocks to supplement domestic stocks and bonds, Morningstar noted.

Investors should do their homework when it comes to liquid alternatives — equity market neutral or managed futures strategies, for example — to ensure that they understand what they hope to achieve with those investments, Kephart said.

Vanguard’s Version

Vanguard’s baseline 60/40 portfolio uses a global or “broad market” approach with exposure to U.S. and international equities and investment-grade fixed income markets in the United States and abroad, with hedging against the U.S. dollar, said Todd Schlanger, senior investment strategist in Vanguard’s investment strategy group.

“The beauty of that strategy is it's really diversified among pretty much all segments of the market,” Schlanger said. “It’s a very diversified portfolio, and that's why it tends to perform well across different market cycles.”

In April, when U.S. markets sold off, Vanguard’s broad market 60/40 posted a gain, he noted. As of last week, the strategy was up 1.14% year to date, and its 10-year average return is 6.3%, Schlanger noted; it fell by 16% in 2022 and is up a cumulative 28.8% since then, he said.

The Vanguard LifeStrategy Moderate Growth Fund essentially implements this asset allocation, and intermediary clients in the company’s financial advisor business can represent the strategy through various products, Schlanger noted.

An Advisor’s View

Meanwhile, Jon Luskin, a fee-only financial advisor who hosts the Bogleheads Live podcast, said via email that while he’s a diversification fan, he generally avoids some asset classes included in many diversified portfolios, such as gold, commodities, junk bonds and outsize positions in small-cap stocks and REITs.

“A low-cost, diversified portfolio of worthy asset classes — global stocks and investment-grade bonds — will almost always be an investor’s best bet,” he said. “A 60/40 portfolio can often be near perfect for those in or on the cusp of retirement. That stock/bond mix comes up again and again in the research as near optimal.”

Luskin often advises clients to keep their investments as simple as possible. For a retiree, that can mean opting for a single balanced fund, like Vanguard’s LifeStrategy Moderate Growth Fund Investor Shares (VSMGX) or the iShares Core 60/40 Balanced Allocation ETF (AOR), he said.

“Most alternatives, as sexy as they sound, are full of high fees and undisclosed risks,” Luskin said. “That can be a great deal for whoever is pitching you the alternative asset. Yet, often alternative assets are a terrible deal for the end investor. Successful investors stick with their simple, boring portfolios. It’s what works.”