Vanguard's President Calls for 60% Bond Portfolios. Advisors Are Skeptical.

Further, Davis says, given how bond yields have risen over time, Vanguard expects investors to realize returns from U.S. and foreign bonds similar to the performance they would see from U.S. equities — about 4% to 5% — with lower risk. The giant asset manager also expects non-U.S. equities to outperform U.S. stocks over the next decade, the article notes.

Shawn Tully, a Fortune senior editor-at-large, called Davis’ recommended allocation “a radical rebalancing” for investors who let U.S. equities gobble more and more portfolio space in a period when bonds and foreign stocks underperformed.

Overall, a spokesman said in an email recently, Vanguard’s 10-year outlooks favor bonds.

Other market participants take a different view.

“I personally love Vanguard and John Bogle was one of the first people I read to learn more about money and the industry," Peter Mallouk, Creative Planning President and CEO, told me by email. "He is an industry legend, and rightfully so. This advice though, I believe, is way off base and will lead to tremendous wealth erosion.

"We are living in a world of excess deficit spending and money printing," he said. "Individuals need to not only protect their short term wealth, but also have enough in equities to stay ahead of inflation. A 60% bond portfolio is much riskier than it sounds, and will almost certainly result in underperformance when looked at over a decade."

Carson Group strategists also dissented.

"Heavily underweighting stocks for the next decade takes uncommon conviction in a historical anomaly: The S&P 500 has beaten bonds in ~85% of rolling 10-year spans, and today’s efficiency-driven earnings growth despite high-but-partly-justified U.S. valuations argues for patience — not retreat," Barry Gilbert, VP, asset allocation strategist at Carson Wealth, told me via email.

Ryan Detrick, Carson Group's chief market strategist, added:

"It is important to remember that most European stock markets are just now breaking out above levels from 2007. Small caps and transports [transportation stocks] still haven't hit new highs in the U.S. Is the music really about to stop when we see this? We'd say no. In fact, there are many signs that this global bull market likely has a lot more life left than many expect. Stay the course and stay diversified with a global portfolio is our best advice."

A Vanguard Watcher’s Caution

Jeff DeMaso, editor of The Independent Vanguard Adviser, addressed Davis’ comments in the newsletter, asking whether bonds are the new stocks. An even split between U.S. and foreign equities “is even broader than Vanguard’s already hefty allocation to overseas markets in its LifeStrategy and Target Retirement funds,” he wrote in late July.

“In short, Vanguard sees bonds matching stocks with less risk. If that’s your view, then yes, you should own bonds over stocks,” DeMaso wrote. “Before you head for the bunker, remember that Vanguard — and many other strategists — have been forecasting below-average U.S. stock returns for at least a decade.”

At year-end 2015, Vanguard projected that global stocks would return 6% to 8% a year, but in the decade ended June 30, its Total World Stock Index delivered a 10% annual return, he wrote. And while Vanguard expected U.S. stocks to lag foreign markets, domestic equities outperformed global shares by more than 7 percentage points per year, he added.

DeMaso noted that Vanguard’s time-varying asset allocation, or TVAA, model suggests a 30%-70% stock-bond mix, although he said the firm’s mutual funds apparently don’t use it.

(The TVAA portfolio strategy dynamically adjusts allocations among different investment types in response to changing economic and market conditions, and the firm integrates it into the Vanguard Asset Allocation Model, the spokesman said.)

Advisors Weigh In

I recently asked advisors to comment on Davis’ recommendation and heard various reasons for disagreement, sent by email.

Jay Zigmont, Childfree Wealth and Childfree Trust founder and CEO, generally recommends 60% U.S. stocks, 20% international stocks and 20% fixed income.

"Unfortunately, 60% fixed income is not taking on enough risk for most people to beat inflation. The days of having your bond allocation match your age really don't work anymore," he told me.

“We follow a simple, passive, long-term investing strategy. We use three ETFs, the U.S. stock market, the world stock market, and bonds. A 60/20/20 split is a good starting point for most of our clients, and we then adjust the equity/bond split up or down based on their risk tolerance. The 60/20/20 is how I personally invest, just using ESG ETFs instead of general ones,” Zigmont said.

His firm uses Vanguard funds: the Vanguard Total Stock Market ETF (VTI), Vanguard Total International Stock ETF (VXUS) and Vanguard Total Bond Market ETF (BND).

Others also shied away from support for a portfolio with 60% allocated to fixed income.

“Investment allocations are NOT one-size-fits-all,” said Samantha Mockford, an associate wealth advisor at Citrine Capital. “People should invest in a diversified portfolio, with the allocation based on the investor's unique goals, risk tolerance and timeline.”

A young person saving for retirement may be able to weather greater volatility in exchange for higher returns over time, she noted. “If that same young person is saving for a house down payment in the next three years, then they cannot afford to liquidate investments during a normal dip in the markets, so they should invest more conservatively.”

Retirees often need to invest in very conservative portfolios, but if pension benefits, required minimum distributions and Social Security provide enough for their living expenses and they’ve earmarked invested assets for their heirs, they may be able to invest those assets more aggressively, Mockford added.

Daniel E. Milks, the founder of Fiduciary Organization and Woodmark Advisors, also cautioned against generalizing portfolio allocations and questioned the 20% allocation to international equities.

“Historically, international markets have underperformed U.S. markets over the long term, so giving them equal weight doesn’t make sense for most of my clients,” Milks said.

A small tactical sleeve for short-term opportunities can make sense, he added, but should never replace a well-designed, long-term strategy.

Robert S. Jeter II, an advisor at Back Bay Financial Planning & Investments, disagreed with the recommendation but said he understood it.

“While I agree with most of the ‘why’ they are recommending it, I think it lacks an appreciation for the dynamism of U.S. capital markets and corporations. However, since I agree with their methodology, I am taking ‘tilts’ towards fixed income, U.S. small/mid and international stocks compared to a neutral market-cap weighted benchmark,” Jeter said.

“I think by positioning yourself with an allocation like that for the coming decade may offer very limited upside when it comes to offsetting inflation and not learning the lessons of the last decade in looking forward. Valuations, while high in the U.S. are the way they are with good reason. Higher profit margins, quality balance sheets, etc.,” he added.

“As we ride this major wave of cap-ex spend in the U.S. on AI, I think such an underweight here really may set-up for missing the productivity gains and earnings growth such investment may make. Such an allocation without reading more into it almost seems like preparing as if it were 1999. I don't think that is the case here,” Jeter said.

Natalie Slagle, founding partner and financial planner at Fyooz Financial Planning, also disagreed with the suggestion.

“We will not be recommending this portfolio allocation to our clients. Most of our clients rely on their portfolios to sustain their livelihood for decades. Moving to a more conservative allocation in hopes, without any guarantee, of achieving similar returns sets unrealistic expectations,” she said.

“Such a strategy would also require near-perfect timing. Additionally, we would face the challenge of timing a future shift back into equities, further compounding risk. Our philosophy prioritizes building portfolios that endure for multiple decades,” supporting clients throughout their lifetimes and potentially their heirs.

Vanguard Stands Firm

"We certainly stand by Greg’s position that it can make sense for investors to consider increasing their allocations to both bonds and international stocks. I wouldn’t want to get too anchored to the specific figures, it’s not that we believe every investor should be 60/20/20 in bonds/US stocks/International stocks. Each investor’s allocation will need to reflect their individual circumstances," a Vanguard spokesperson told me by email.

"The broader point is that our long-term (10-year) outlook for U.S. stocks is in the range of 3.3% to 5.3% per year, while U.S. bonds are 4% - 5% per year. In other words, investors can expect similar returns from U.S. stocks and bonds over the next decade, but with lower volatility on bonds. So investors may want to consider whether they can achieve similar returns with lower volatility by shifting some of their portfolio towards fixed income," the spokesperson said.

"It’s a similar story on U.S. vs. international stocks. Our outlook for international stocks is 5.1% - 7.1% per year over the next 10 years, higher than U.S. stocks. So, investors might want to consider shifting more of their equity allocation to international stocks."

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