60/40 Portfolio 'Was Never Dead': Vanguard Researcher

What You Need to Know

The allocation has done well by investors over the long term despite weak performance in 2022, Fran Kinniry says.
Other mixes, even 20-80, can be the right balance in the right situation.
Historically, a small percentage of stocks have generated most U.S. market returns.

The long-popular 60% stocks-40% bonds portfolio remains alive and well and has proved to be successful despite a rough 2022, according to a key Vanguard Group researcher.

When both stocks and bonds tanked in 2022, many analysts pronounced the traditional balanced portfolio dead. But the 60-40 did well in 2023, returning 18% as the market roared back, Morningstar noted recently.

Fran Kinniry, who heads the Vanguard Investment Advisory Research Center, said in a recent interview that last year’s “staggering” return followed a 2022 in which the 60-40 portfolio logged its fifth-worst result.

“So the irony of all that is if you even look at the 3-year, 5-year, 10-year, the 60-40 was never dead,” Kinniry said. “I think people misunderstood that because it did have a bad year in 2022. But even if you look back without last year and look at the long-run return, 3-year, 5-year, 10-year, you would have been well-served owning a balanced portfolio.”

Not that the portfolio must be split along the 60-40 lines, he added.

“I think the danger also is just saying 60-40 because 60-40 is just one asset allocation. That’s not the right asset allocation for all investors,” Kinniry said.

Different Clients, Difference Balancing

Many allocations serve many purposes.

“There’s nothing wrong with 70-30. There’s nothing wrong with 80-20. There’s nothing wrong with 20-80,” Kinniry said. “It really should all go back to what are your clients’ goals, their objectives, their risk tolerance, their time horizon.”

The 60-40 mix, he added, “gets thrown around as if it’s the only portfolio. What we really need to say and what most people should say is a broadly diversified portfolio that rebalances (and is) low cost and stays the course. Whether that’s 20-80 or 80-20, it doesn’t matter.”

 A 20-80 portfolio is “a perfectly good portfolio” for a retired 70- or 80-year-old, Kinniry explained. “And on the other end, a young investor who’s just graduated from college, 60-40 would be too conservative. I think we have to always kind of take the 60-40 with a grain of salt. It really is just one allocation among hundreds of allocations.”

Rather than trying to guess what will happen in a given year, advisors should focus on their clients’ goals, time horizons and risk tolerances, formulate an asset allocation and rebalance to that, Kinniry suggested, a recommendation that reflects Vanguard’s stay-the-course philosophy.

If investors had drawn conclusions from market performance in the first 10 months last year,  “it probably would have been very detrimental,” he said.

Kinniry cited the pitfalls in trying to time the market and warned about the risks involved in underweighting specific stocks — for client portfolios and advisors’ practices.

Research shows that in the long term, it’s hard for active fund managers to beat indexing, “and if that is true, why would it be easy to guess what next year’s return is going to be? It’s not easy. History shows it’s wrong way more than correct. And if you’re an advisor, you really run the risk of getting fired by your client if you guess wrong,” he explained.