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.
