Key Takeaways
- In Vanguard’s 2025 outlook, analysts suggest that long-term investors could benefit from swapping their classic 60/40 portfolio for one that leans more heavily on fixed income.
- They recommend increasing fixed-income exposure to shift to a 50/50 equity and fixed-income allocation—or even a 40/60 allocation.
- Vanguard analysts are optimistic about a more conservative portfolio because they believe U.S. stock market returns will fall over the long term due to currently high valuations.
- Additionally, Vanguard projects higher yields on fixed income even as central banks embark on rate-cutting cycles.
The classic 60/40 equity and fixed-income portfolio enjoyed gains as stocks soared this year, but analysts at Vanguard suggest swapping it for a more conservative and fixed-income-heavy asset allocation of 50/50, or even 40/60 in the year ahead.
A senior Vanguard portfolio construction manager projected a 5% to 7% annualized return for a 60/40 portfolio over the next decade in a call earlier this week about the firm’s 2025 outlook, released Wednesday. But greater exposure to fixed income may be more beneficial.
“Given the subdued expected equity risk premium, perhaps the optimal balance between bonds may be slightly different than the 60/40,” Roger Aliaga-Diaz, global head of Portfolio Construction at Vanguard, said in the call Monday. “From a risk perspective, a tilt towards fixed income could be beneficial—something like a 50/50 or even 40/60—because it could produce very similar returns to the 60/40 with much less volatility.”
Why Should Investors Become More Conservative?
So why are Vanguard analysts bullish on a more conservative portfolio?
Aliaga-Diaz said he believes that stock market returns could decline in the future due to the high equity valuations in the U.S. market, which have been increasing over the past two years.
“In the near term, we could continue to see momentum in the markets. When we think about the next five years plus (like portfolios for retirement or saving for college), valuations will start dragging down long-term returns,” he said.
As a result, Aliaga-Diaz emphasizes the importance of not timing the market and international diversification, noting that “starting valuations are at much lower level” for global equities beyond the U.S.
As for fixed income, Vanguard has a more rosy long-term outlook for yield. Its analysts say they believe that, globally, interest rates ultimately will settle at higher levels than in the 2010s.
“The era of sound money—characterized by positive real interest rates—will endure, setting the foundation for solid cash and fixed-income returns over the next decade,” wrote Vanguard analysts in the 2025 outlook.
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