Expert insight
Time to move on from the 60/40 debate
June 12, 2023
In an InvestmentNews article, Roger Aliaga-Díaz, Vanguard’s global head of portfolio construction and chief economist for the Americas, addresses the debate on the merits and limitations of the traditional 60% stock/40% bond portfolio.
Despite losses in 2022, the 60/40 portfolio has been doing exactly what it’s supposed to do—delivering respectable returns on average over the medium- to long-term with moderate volatility, says Aliaga-Díaz. Far from being left for dead, the 60/40 still serves as the foundation for balanced investing.
It’s a foundation that has room for customization to accommodate personalized needs and the evolving understanding of the drivers of risk premiums for traditional and alternative asset classes. Modern technology, in turn, allows personal customization at an economically feasible scale.
To read more of what Aliaga-Díaz has to say, see the InvestmentNews article.
Related links:
- The improved outlook for the 60/40 portfolio (article, published March 2023)
- Enduring appeal of the 60/40 portfolio (2-minute video, published March 2023)
- Like the phoenix, the 60/40 portfolio will rise again (commentary, published June 2022)
- Yes, the credit risk premium is worth it (article, published May 2023)
Notes:
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Investments in bonds are subject to interest rate, credit, and inflation risk.
Past performance is no guarantee of future returns.
IMPORTANT: The projections and other information generated by the Vanguard Capital Markets Model regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. VCMM results will vary with each use and over time.
The VCMM projections are based on a statistical analysis of historical data. Future returns may behave differently from the historical patterns captured in the VCMM. More important, the VCMM may be underestimating extreme negative scenarios unobserved in the historical period on which the model estimation is based.
The Vanguard Capital Markets Model® is a proprietary financial simulation tool developed and maintained by Vanguard’s primary investment research and advice teams. The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include U.S. and international equity markets, several maturities of the U.S. Treasury and corporate fixed income markets, international fixed income markets, U.S. money markets, commodities, and certain alternative investment strategies. The theoretical and empirical foundation for the Vanguard Capital Markets Model is that the returns of various asset classes reflect the compensation investors require for bearing different types of systematic risk (beta). At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly financial and economic data from as early as 1960. Using a system of estimated equations, the model then applies a Monte Carlo simulation method to project the estimated interrelationships among risk factors and asset classes as well as uncertainty and randomness over time. The model generates a large set of simulated outcomes for each asset class over several time horizons. Forecasts are obtained by computing measures of central tendency in these simulations. Results produced by the tool will vary with each use and over time.
