By Roger Aliaga-Díaz, Ph.D, Vanguard chief economist, Americas, and head of portfolio construction.

Approaching the midpoint of 2022, market, economic and geopolitical conditions all appear fraught. Inflation is hitting 40-year highs, the US Federal Reserve and other central banks are sharply reversing or looking to reverse monetary policy, the pandemic hasn’t gone away, and supply chain woes have been exacerbated by Covid-19 lockdowns in China and Russia’s invasion of Ukraine, with the latter putting the Western bloc the closest to a war footing in decades.

Not surprisingly, this perfect storm of negative market drivers has pushed share and bond prices south in lockstep, impairing the normal diversification of risks in a balanced portfolio.

Share-bond diversification in historical context

Brief, simultaneous declines in shares and bonds are not unusual, as our chart shows. Viewed monthly since early 1999, in euro terms, the nominal total returns of both global shares and investment-grade bonds have been negative around 13% to 14% of the time. That’s a month of joint declines a little over every seven months or so, on average.

Extend the time horizon, however, and joint declines have struck less frequently because in the period covered investors never encountered a three-year span of losses in both asset classes (and barely encountered it over a one-year period).

Historically, share-bond diversification recovers within a few months

Past performance is no guarantee of future returns.

Source: Vanguard. Notes: Data reflect rolling period total returns for the periods shown and are based on underlying monthly total returns, with dividends and income re-invested, for the period February 1999 to May 2022. Global shares are represented by the FTSE All-World Index and global bonds are represented by the hedged Bloomberg Global Aggregate Index. Returns are in EUR.


As our chart shows, drawdowns in global 60% share/40% bond portfolios have occurred more regularly than simultaneous declines in shares and bonds. This is due to the far-higher volatility of shares and their greater weight in that asset mix. One-month total returns were negative just over one-third of the time in the period we looked at. The one-year returns of such portfolios were negative about 18% of the time, or once every five-and-a-half years, on average.

But we need to remind ourselves of the purpose of the traditional balanced portfolio.

The maths behind 60/40 portfolios

Catchy phrases like the “death of 60/40” are easy to remember, don’t require complex explanations and may even seem to have a ring of truth in the difficult market environment we are in today. But such statements ignore basic facts of investing, focus on short-term performance and create a dangerous disincentive for investors to remain disciplined about their long-term goals.

Keep in mind:

  • Over the next 30 years, the Vanguard Capital Markets Model (VCMM) projects the average return of a 60/40 portfolio to be around 5% in euro terms1. But the inherent volatility of markets means these returns will always be uneven, comprising periods of higher or lower – and, yes, even negative – returns.
  • The average return we expect can still be achieved if periods of negative returns (like this year) follow periods of high returns. Take the US market, where we can analyse data stretching back close to a century. In the three years to 31 December, 2021, a 60/40 portfolio delivered an annualised 14.3% return in US dollar terms. This means losses of up to 12% for all of 2022 would only bring the four-year annualised dollar-return to 7%, which is not far off historical norms2 and in line with what we expect in the long-term3.
  • On the flip side, the maths of average returns suggests that periods of negative returns must be followed by years with higher-than-average returns. Indeed, with the painful market adjustments year-to-date, the return outlook for the 60/40 portfolio has improved, not declined. Driven by lower share valuations, our internal modelling projected 10-year returns for global shares in euros terms, for example, that, by March-end, were 0.35 percentage points higher than they were at the end of 20214. And with higher interest rates, the Vanguard Capital Markets Model’s (VCMM) projections for 10-year global bond returns were more than 0.8 percentage points higher over the same period5. So, overall, the 10-year annualised average return outlook for the 60/40 portfolio improved by 0.6 percentage points6 – and it’s likely to have improved further since then, given the market weakness witnessed from April onwards.
  • Market timing is extremely difficult even for professional investors and is doomed to fail as a portfolio strategy. Markets are incredibly efficient at quickly pricing unexpected news and shocks like the invasion of Ukraine or the accelerated and synchronised central bank response to global inflation. Chasing performance and reacting to headlines tend not to work in the long-term since it often amounts to buying high and selling low. Far from abandoning balanced portfolios, investors should keep their investment programmes on track, adding to them in a disciplined way over time.

No magic in 60/40 but in balance and discipline

I’ve focused here on the 60/40 portfolio because of its relatively high profile in the financial press. And in our view, 60/40 is a sound benchmark for an investment strategy designed to pursue moderate growth. But prominent and useful as a benchmark though it is, the 60/40 formula is not somehow unique and magical.

So talk of its demise is ultimately a distraction from the business of investing successfully over the long term.

The broader, more important issue is the effectiveness of a diversified portfolio, balanced across different asset classes – in the main, shares and bonds – in keeping with an investor’s risk tolerance and time horizon. In that sense, “60/40” is a sort of shorthand for an investor’s strategic asset allocation, whatever their actual target mix.

For some investors with a longer-time horizon, the right strategic asset allocation mix may be more aggressive, say 80/20 or even 90/10. For others, closer to retirement or more conservative-minded, 30/70 may do it. The suitability of alternative investments for a portfolio depends on the investor’s circumstances and preferences.

Whatever one calls a target asset mix and whatever one includes in the portfolio, successful investing over the long term demands perspective and long-term discipline. Stretches like the beginning of 2022 – and some bear markets that have lasted much longer – test investors’ patience.

But this isn’t the first time that the 60/40 portfolio and markets in general have faced difficulties – and it won’t be the last. Our models suggest that further economic travails lie ahead and that market returns will still be muted.

But the 60/40 portfolio and its variations are not dead. Like the phoenix, the immortal bird of Greek mythology that regenerates from the ashes of its predecessor, the balanced portfolio will be reborn from the ashes of this market and continue rewarding those investors with the patience and discipline to stick with it.


1 IMPORTANT: The projections and other information generated by the VCMM regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Distribution of return outcomes from VCMM are derived from 10,000 simulations for each modeled asset class. Simulations as of 31 March, 2022. Results from the model may vary with each use and over time.

2 According to Vanguard calculations, the annualised US dollar return of a 60% US stock and 40% US bond portfolio from 1 January 1926 through to 31 December 2021 was 8.8%. The calculations are based on a range of historical data collated from Standard & Poor’s, Dow Jones, MSCI, CRSP, Morningstar and Bloomberg. US stock returns are represented by the S&P 90 beginning in 1926; the S&P 500 Index from March 1957 to 1971; Dow Jones US Total Stock Market Index (formerly known as the Dow Jones Wilshire 5000 Index) from January 1972 to April 22, 2005; MSCI US Broad Market Index to 2 June 2013; and CRSP US Total Market Index thereafter. US bond returns are represented by the Dimson-Marsh-Staunton database from Morningstar, Inc., beginning in 1926; Bloomberg US Aggregate Bond Index from January 1976 to 31 December, 2009; and Bloomberg US Aggregate Float Adjusted Index thereafter.

3, 4, 5, 6 Based on the long-term projections of the VCMM, a proprietary financial simulation tool developed and maintained by Vanguard’s primary investment research and advice teams. For more information see footnote 1. 

Investment risk information

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

Past performance is not a reliable indicator of future results.

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IMPORTANT: The projections or 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 US and international equity markets, several maturities of the US Treasury and corporate fixed income markets, international fixed income markets, US 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.

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