Need to Know: Vanguard says the outlook for the 60/40 model is looking rosier, but here’s the asset allocation it prefers the most

by | Jan 5, 2023 | Stock Market

It’s still jaw-dropping to look at the chart of asset performance in 2022. The dot for 2022 is way over to the left — that is, signaling a year in which both stocks and bonds plummeted in value.

Analysts at Vanguard say, not to worry — they still think 2022 was just an aberration. “This breakdown in correlation was disconcerting for many investors and led some to question whether the 60% stock/40% bond portfolio still had merit as an investment tool,” says Roger Aliaga-Diaz, head of portfolio construction. “Our research finds that correlations can move aggressively over shorter investment horizons but that it would take long periods of consistently high inflation for long-term correlation measures—those that more meaningfully affect portfolio outcomes—to turn positive.”

And even hawks like Minneapolis Fed President Neel Kashkari say there are tentative signs that inflation has peaked. Data out of Italy on Thursday morning reinforced that view. According to Vanguard, the nosedive in asset prices last year has raised expectations for performance over the next decade, “because yields on developed-market sovereign debt are the foundation on which other risky returns are built,” he says. The balanced portfolio, he says, still offers the best chance of success.


As the chart shows, however, its model for asset allocation has more of a tilt toward bonds and emerging markets than a conventional 60/40 model. It’s a 50-50 model between stocks and fixed income, including 10% for emerging market stocks.The market U.S. stock futures
flipped lower after an unexpectedly strong ADP private-sector jobs estimate. The yield on the 2-year Treasury
rose 10 basis points to 4.45%. For more market updates plus actionable trade ideas for stocks, options and crypto, subscribe to MarketDiem by Investor’s Business Daily.The buzz ADP estimated 235,000 pri …

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