It’s been a good year so far for Vanguard’s so-called 40/60 strategy. The model portfolio is overweight on fixed income, with the idea that higher bond yields can offer some cushion against moderate price increases. Yields, which move inversely to prices, have remained elevated this year. The 10-year Treasury yield once again topped 4.5% last month and is now around 4.46%. The strategy uses a method called time-varying asset allocation, which is based on Vanguard’s 10-year forecasts for returns. The exact portfolio breakdown is 38% in equities and 62% in fixed income. “So far this year the positioning of the portfolio has paid off for us,” said Vanguard senior investment strategist Todd Schlanger. Equities have run up in recent years and have become rich, especially large-cap growth stocks, he said. Vanguard estimates that the U.S. stock market is trading 37% above the top end of its fair-value range. That makes it more volatile, he said. “When you have high valuations, that can create a vulnerability that makes them more susceptible to experiencing declines when there is uncertainty,” Schlanger explained. The stock portion of the 40/60 steers away from large-cap growth and tilts towards value and developed markets outside of the U.S. While growth stocks, particularly tech, had a banner 2024, they had a rough start to 2025 — and took a big hit during April’s tariff-induced sell off. European stocks have also outperformed U.S. stocks. In April, the U.S. market returned -0.7%, while developed markets outside the U.S. rallied 4.7%, Vanguard noted. The fixed-income portion has a bit of a tilt towards longer-duration bonds, Schlanger said. The assets “performed better in periods of uncertainty and volatility,” he said. In March, the firm moved away from U.S. intermediate credit bonds, which had been its heaviest fixed-income allocation, and into U.S. aggregate bonds. The latter provides diversification benefits, Schlanger said. The Bloomberg U.S. Aggregate Index includes investment-grade bonds such as Treasurys, corporates, and agency mortgage-backed securities. The aggregate bond index is also a bit longer in duration than the credit index, he said. “Our expectation is in the years ahead we will start to see a gradual fall in interest rates that will impact shorter-term bonds,” Schlanger noted. Less volatility While Vanguard is predicting an increase in expected returns for its 40/60, the other big draw is its decrease in volatility, Schlanger said. When assessing its performance, the firm compared it to a 60/40 benchmark made up of 21% international and 39% U.S. in its stock bucket and 28% U.S. and 12% international in bonds. “Relative to the static broad-market benchmark, it is only expected to increase expected returns around 10 basis points, which isn’t much, but we are seeing expectations of a decline in volatility of more than 200 basis points, which leads to a much better risk-adjusted return,” Schlanger said. The predicted drawdown in the 40/60 portfolio is -4.2%, versus -8.3% for the benchmark, he added. Don’t count out the 60/40 The bond-heavy portfolio isn’t necessarily better or worse for someone who wants to be in a traditional 60/40 portfolio , Schlanger said. Those investors may just want to maintain a static exposure to the markets, he noted. “There is a lot of research that says that is a great way to invest,” he said. The 40/60 is “for that investor who wants to be a little bit more active and more conscious of the markets and current conditions — how can I better position my portfolio to take risks and take advantage of opportunities that are out there,” Schlanger added.
