Beyond 60/40: Building portfolios for the next decade

Christine Kashkari: Welcome to Better Vantage by Vanguard, a podcast series hosted by Custom Content from WSJ and Vanguard. In this series, we will discuss the topics that are top of mind for today's financial advisors and investors. And joining me in this series as my co-host is Joe Davis, Vanguard's global chief economist. Good to see you again. 

Joe Davis: I'm excited. 

Christine: I am too, because today we are joined by a very special guest flying in from London. Please welcome Jumana Saleheen, who is Vanguard's chief economist and head of Investment Strategy Group in Europe. Jumana, welcome. 

Jumana Saleheen: Thank you, Christine. I'm so excited to be here today. The topic for today is talking about people's savings. That's a really important topic, and I'm going to talk about: What do we have to do to get it right? 

Joe: Pleasure working with Jumana. Christine, what we'll get to today is—you saw in the title of the podcast: 60/40—so what does that mean? Where do those numbers come from?  We're talking about asset allocation, portfolio construction, which is really fundamental to all of our long-term success. Whether your number is 60/40 or not, I think we're going to get to that.

Christine: I think at the end of this episode, Jumana would have settled the debate around 60/40 for all of us. 

Jumana: First of all, I think it's important to just say what is 60/40, because it actually means different things to different people. So very literally, you could say 60/40 is 60% equities, 40% bonds, right? That's the literal definition. But for some other people, they actually use it as a shorthand for a broad index portfolio. So, it's not necessarily 60/40. You might think it's a target allocation. It could be 100%, could be 80% equity and the rest in bonds. 

So it's more thinking: What does this mean? This is what it means. 

Christine: And Jumana, you came from London, where 60/40 is pretty popular. So you can absolutely tell us your best position to tell us about the opportunities and challenges of rethinking asset allocation. 

Jumana: We know that the U.S.-only 60/40 delivered on an annualized basis on average 8% nominal returns.* Now I'll take that any day. That's really impressive. So the 60/40 is timeless and time tested. 

However, when we speak to advisors, when we speak to investors, what we're hearing is actually the conversation is evolving as capabilities evolve, as our research evolves, we see personalization is where the debate is evolving. And really that's what we're here to talk about today is: How is this debate evolving? 

Christine: But why is there still this debate around it and has 2022 something to do with it? 

Jumana: Yeah, absolutely. One of, you know, the best-selling, most popular products is the 60/40. And at that time, if I take you back to 2022, inflation was high. People were worried about inflation. Interest rates started rising from historic lows. So it was this scenario where stocks were falling, bonds were falling, they were both falling, and actually the 60/40 in that year, 2022, did deliver negative returns. But guess what? It's 2025, and it's bounced back. We've seen it. 

Joe: It came under heat in 2022. I read about the 1970s. I heard the 60/40 was broken in 1990s around runaway tech stocks. I'm not being defensive here for 60/40, and everyone will know I work at Vanguard, they could say I'm biased, but I'm trying to be unfiltered on this, right? I've heard this challenge come up, but up again, why does this come up so frequently? 

Jumana: I think it comes down to what type of things can drive that type of concern and lead to those negative returns. And it's really what's happening in the background, right? So if you have a situation, what type of things matter? The correlation between equities and bonds, that's going to matter, where inflation is and do you have inflation protection or does your holding get eroded with inflation? That will be another consideration. 

And back in 2022, and there are episodes, there are decades in which the 60/40 didn't necessarily give you that 8%, right? The whole beacon of the 60/40 is that balance, where if one thing goes down, the other thing is still giving you that returns. So that's basically the principle of diversification that Jack Bogle, our founder, spoke about, is have that balance so that when the stock market goes up and down, you have the bonds to give you that diversifier and that sort of anchor in your portfolio returns. 

Christine: So if achieving a dynamic balance is the goal, how do you go about that? 

Jumana: When we think about the dynamic portfolio, what does that mean? I can give you a couple of examples where if you're taking a view on the market and what I mean is: Where's the market going to go? Where's the economy going to go? Those are sort of market views. So you're making active bets, you're taking active bets. 

Then in that case, if we think about the 60/40, that could evolve into where some part of your 60% equity instead of being in an index fund could be in an active fund or that 40% of your bond holding instead of being in fixed income, that's index-related, you can make that active-related. So that's one way where you can think about your 60/40 evolving into, "Hey, it can be a blend of active and indexing." 

Another way is also thinking about models, systematic approaches, looking at data, looking at the evidence, looking at history, but also thinking about why the future might be different by using the information that you get in those historical relationships. And you could think about investing in a time-varying model, what we call time-varying asset allocation, which is our portfolio construction framework, which allows you to take on different forms depending on what the model is telling you. But what you get with that is model risk. 

So the two examples I'm giving here is if people want to deviate from 60/40, "Hey, do you want to deviate active? Do you want to do model?" And you can do both. 

Joe: There's a widespread confusion I've seen between some will say, "Hey, listen, I have the short-term view, and I want to exploit it." Some will call that tactical versus: How do I even know if my 60/40 has a reasonable range of returns to even achieve my retirement goal or savings goal or whatever goal I'm trying to achieve? Whether people realize it or not, investors realize or not, you're making certain assumptions around what are the expected returns, payoffs of those stocks and bonds, or whatever the asset is. 

And I think you were going there with that systematic process of: Why is that helpful? I mean, I could just throw out numbers today. What are the limitations of that versus being a little bit more systematic? 

Jumana: I think of a spectrum. You have a spectrum here where you can have different types of investment philosophies and methodologies. At one extreme, you can have a very narrative-based philosophy, right? You can tell stories about, "Oh, I think I have conviction…" 

Joe: I see a lot of them on TV. 

Jumana: "I don't have any data, but I just have a really good feeling. My gut feeling tells me this. I'm going to make a call on this." So that's purely narrative-based. On the other side, you have very, very deep evidence-based systematic models, lots of data, lots of correlations between different market assets, right? And you look at the past, but you also take judgments on the future. You're systematic, and therefore you're not ad hoc. 

You're also very explicit in that world of systematic at the high end, but what are your assumptions? What are your constraints, right? So we are thinking about it in a risk management approach. Do you feel comfortable with those assumptions? Is that within your risk management approach? 

And I really think that the industry is getting tired of just narrative-based, and they want to move on to the righthand side. 

But you know you have things in the middle as well, where there's a little bit of evidence, a splatter of evidence. 

Joe: That's judgment.

Jumana: Absolutely, and judgment is key. There's always going to be a little bit of judgment because the future doesn't always look like the past, right? So you can't just look at the past. You have to look at the past to inform what the future might look like, and judgment is important, but you want it to be systematic judgment. I think, Joe, that's the main thing I would say is models give you that discipline. 

Joe: I think what matters for asset allocation—is 60/40 appropriate for me? Or what's the probability of success? I don't know that. I'll beat inflation, or should I go 70/30, take a little more risk given the cost of living has gone up or my goals have changed? 

I think what you're saying is, have that disciplined approach or have some systematic approach to: What are those expected returns for 60 and the 40? What numbers do I plug in, or if I’m an advisor, what sort of range of returns can I consider for that risk management? 

And if I understand you, if I'm trying to assess economic risk, market risk, valuations, interest rates over the next 3, 5, 10 years, those expected returns are going to change. But that doesn't necessarily mean, though, that an investor should change their portfolio. It just means their expected return of that portfolio—the range of returns will change. 

Jumana: Another way to think about it is, at times when you have different market views, you actually should change. So for example, right now, when we look at valuations and where they are in the U.S. and in other parts of the world, we actually say the 60/40 becomes the 40/60, right? 

Joe: Whoa, that's pretty bold. 

Jumana: So yeah, that's a bold call, but we are able to make bold calls because it's based on evidence, right? So we have a high level of conviction about making bold calls when we have the evidence. It's based on the evidence. It's based on the probabilities. 

Christine: I feel like maybe the reason why 60/40 in its most basic essence is so popular is because it's simple to think about. Just set it and forget it almost. But what you're suggesting here is not to do that, right? To balance and to make how you manage this more adaptive, so to speak. 

The Wall Street Journal ran a piece recently that cited a survey saying that median investors spend a total of six minutes researching before making a decision on a stock. I mean, with AI, that's probably down to one minute. 

Joe: One minute, wow.

Christine: So how do you help them? There's just a lot of information, right? And a short attention span. How do you help them navigate the approach that you've been talking about? 

Jumana: Our preferred approach is, if you're going to be thinking about your investments, look at the provider and say to yourself a couple of things, right? No. 1, is it an ad hoc approach to investing, that's in that six minutes, or actually is it structured? Have they actually got some frameworks? Have they got some discipline? That's one thing I would look at. 

The second thing I would look at is, we all know the future is uncertain. You can't say with probability, one, that something's going to happen. There's always different scenarios. 
Everybody's talking about scenario one versus scenario two. So, the second advice would be, look at people who are providers who are providing a probabilistic approach, a distribution of outcome. 

Joe: It's tough, right? Because people want one number. People and listeners may want  one number, but we don't live in that world. 

Jumana: Yeah, using data and evidence is really important, but not just projecting forward history, right? Because history is great, but we know that there's lots of new things happening. But use the historical data as a guide to inform your choices about the future. Maybe look at episodes which might be similar to today and project that forward. 

Joe: What I hear Jumana saying is, again: What are those expected returns that are underlying the very assumption of the portfolio was constructed to begin with, right? And either to modify my spending or my long-term assumptions that say when I can retire or buy that house or whatever, or I don't want to change those goals. Hence, given your risk assessment, I may modestly have to change my portfolio because one or the other has to give. 

I just wanted to say to the listeners that does not necessarily mean, Vanguard is advocating, I should deviate my portfolio. But at the same time it's saying, "No, that has always been a possible approach from risk management, defensively, or even being offensively or willing to take some active risk. But there's always been trade-offs here, and I think being systematic, I think guards against being too aggressive or even potentially emotional, particularly in periods of volatility, when I see most of the questions or consternation.

Christine: The approach is like consistently looking at what's going on and monitoring your portfolio and adjusting as needed. When you talk about Vanguard, you're well known for your investment principles and one of that is stay the course. Does anything that we've been talking about now contradict that? Just stay the course? 

Jumana: I don't think it contradicts "stay the course," right? I think "stay the course" means a few things. It's saying stay invested, right? So it says don't try to time the market, it's your time in the market. So "stay the course" means stay invested and don't get emotionally driven by events and make drastic changes, which could lead to losses in your portfolio. There's lots and lots of stories of people who have tried to time the market and failed. 

What we're talking about today is, thinking about personalization, thinking about, where is the next frontier, if you like, on balanced investing. It's talking about having capabilities to tilt your portfolio so that you can take advantage of your situation and the market situation, right? 

That's what our models are saying is, there may be some medium-term changes out there on the horizon where you could actually benefit by tilting your portfolio. 

Joe: Yeah, and just to build on Jumana, I think never changing one’s asset allocation at all has been confused with stay the course, and they were never, they should never have been completely linked, although they're very similar. 

In fact, Jack Bogle spoke more about the process that, Jumana, you're talking about that we've codified at Vanguard. You've actually called the phrase conservative asset allocation. 

So again, being thoughtful, this is not swinging for the fences. It's not about having a concentrated position unless you really know what you're getting into, and this is around what are the macro risks on the horizon or opportunities? Jumana talked about fixed income. We’ve got higher interest rates today over inflation than we've had in a long time, over 20 years. And so, do I need to take as much risk for the same goals that I may have had 10 years ago? 

So it depends upon the person's situation. But I'm glad you asked the question because it's  not dissonant. 

Christine: And of course, if you change your goals as well, then that just suggests that you need to change your strategy. 

Jumana: Yeah, absolutely, and people's goals do change through their life and life events. You do see changes to your situation, and your goals can change and evolve. 

Joe: How about inflation, though? So this question always comes up. Let's say an investor has that concern. Is my 60/40 prepared for that? 

Jumana: If you are worried about inflation, and many people will be, and will be sensitive to that, a couple of things you can think of is the Treasury Inflation-Protected Securities, known as TIPS. So that's obviously inflation protection. It's designed to protect you from inflation. I would talk about risk management approach, it's all about tilts. You could tilt a little bit more toward that. 

You could also think about commodities, which will also tend to maintain their value because they have a fundamental value over time. 

Joe: It varies by horizon. What are you trying to protect against, right? If someone said, "You know what, I'm concerned about a higher inflation world for the next 10 or 20 years. I don't know what it'll be next year. I really don't care. I'm talking about my next two decades." I think what it would say is, well, "No, you've got to talk about an asset that will outperform the rate of inflation regardless of its wiggles up and down every year." And that, I think, pushes you into stocks. 

What you're talking about is there's inflation hedging of, no, if you care about the short-term shocks, and I want to smooth the bumps and the potholes in the road… would that be fair? 

Jumana: Yeah, that's absolutely fair.  

Christine: What about gold specifically? 

Jumana: Unfortunately, our research shows that gold is actually not such a great hedge against inflation. It has, actually, among all the commodities one of the weakest relationships with inflation. So, we wouldn't really advise in that. And I would say like all that glitters is not gold, right? So gold is not necessarily a good hedge to put it in. 

Christine: Why is that?

Jumana: So I think why is that is because it preserves value, right? So it keeps the value right now, but it doesn't grow your money. And I think that's really the difference. If you just want to say, "Oh, I've got $100 today, and I want it to be $100 tomorrow," maybe you're fine with gold, right? Because it preserves value over time. 

But if you want to make your money work over the long term with that long-term horizon—stocks, bonds—these give you that growth and value. 

Christine: So stay the course is stay invested, but there are smarter ways to stay invested. Jumana, we've covered so much. What would you like our viewers, our listeners to take away from our conversation today? 

Jumana: What are my takeaways? Investment landscape is changing, it's evolving. Balanced investing is taking different flavors. It's personalization. If you want to do it, you’ve got to do it right. Find the right provider who has that high-quality evidence-based underpinned methodologies. 

Joe: Boom.

Christine: That's fantastic. Jumana, I think the takeaway from here is 60/40 is not dead. What should be dead is the debate around 60/40. 

Joe: There you go. 

Christine: Thank you so much, Jumana. It's so great to have you here. Thank you for joining us. 

Jumana: Thank you so much. 

Joe: Wonderful. 

Christine: If you enjoyed this episode and found it helpful, subscribe and share.