Alice Morgan, Photo Illustration for Investopedia by Getty Images
The 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’s analysts believe that a conservative portfolio will be more profitable in the long run due to high stock valuations.
- Vanguard is also projecting higher fixed income yields, even though central banks have begun rate cutting cycles.
Vanguard suggests that in 2015, the traditional 60/40 asset allocation between equity and fixed income portfolios will be replaced by a fixed-income heavy 50/50 asset allocation, or perhaps even a 40/60.
In a recent call, a senior Vanguard manager of portfolio construction projected an annualized return between 5% and 7% for a portfolio split 60/40 over the next decade. The firm released its 2025 outlook on Wednesday. It may actually be better to have a greater amount of exposure in fixed income.
“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 on the Monday call. “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 be more conservative?
Why are Vanguard’s analysts so bullish about a conservative portfolio?
Aliaga Diaz believes the stock market could see a decline due to high valuations of the U.S. equity market. These have increased over the last 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.
Aliaga Diaz stresses the importance of diversification and not timing the markets. “starting valuations are at much lower level” For global equity beyond the U.S.
Vanguard’s long-term forecast for the yield on fixed income is more optimistic. Analysts at Vanguard believe global interest rates will eventually settle higher than they were in 2010.
“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,” Vanguard Analysts in 2025 Outlook wrote
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