An investment industry standard gets tested
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The 60/40 portfolio has been an investment standard for many decades, but it has been on somewhat shakier ground lately.
Why it matters: Investors are looking for new ways to diversify their portfolios in a market fraught with inflation and geopolitical risks, but the trouble is a lot of these strategies are actually less diverse than the traditional mix, a new paper warns.
Catch up quick: A portfolio that comprises 60% stocks and 40% bonds is basically the gold standard mix for retirement accounts, long beloved by the money management industry.
- The idea is if stocks go down, bond prices move in the opposite direction — and you're buffeted from the impact.
Where it stands: This year the mix isn't going super well — stocks have been slumping, while bond prices are falling thanks to accelerating inflation.
- Vanguard's LifeStrategy fund, set to be renamed the Vanguard LifeStrategy 60/40 Fund next month, is down about 1% year to date.
Yes, but: This is hardly a repeat of 2022 — when spiking inflation and falling stocks led to a 16% decline in 60/40 and a big chorus wondering if the mix was kaput.
Zoom out: Still, the results so far highlight something investors are just starting to grapple with: higher inflation's impact on investing.
- 60/40 "was built for a world where inflation was falling, rates were coming down, and bonds could reliably offset equity risk, but that's not the world we're in anymore," says Mark Malek, chief investment officer of Muriel Siebert & Co.
- Investors are now "grasping for solutions" to deal with this, he says.
Friction point: The problem now is that money managers are arguing investors should swap bonds for other assets that are even more exposed to equity, says Dan Villalon, principal and global co-head of the portfolio solutions group at AQR Capital Management.
- He coauthored a post about this last week warning about the trend.
- "Unfortunately, many investors, armed with dubious advice, are doing the opposite of what they should be," writes Cliff Asness, AQR's well-known co-founder, in an introduction to the post.
Zoom in: AQR highlights three popular diversification strategies that actually are more linked to equity risk: private credit, crypto and so-called "buffer funds," which offer stock exposure with downside protection.
- The post's authors say that other actual "diversifiers" do exist — including something called "equity neutral," which lets an investor make paired bets on a stock that they think is going up, with a stock they think is going down.
- Other investment managers argue that commodities are where it's at.
Reality check: Investment behemoth Vanguard still argues for the stability of 60/40.
- "There's not really a clear compelling alternative that's going to provide the same level of diversification," says Todd Schlanger, a senior investment strategist at Vanguard.
- He notes that 60/40 had a great 2025, and it's not surprising that this year there's been a bit of a pullback.
The bottom line: Moving away from a classic investment strategy is harder than it may seem — but the investment industry does like to talk about it.
- "It does seem like the death of the 60/40 portfolio is reported annually," Villalon says. "It's one of the greatest, most common traditions across the industry."
