Classic 60/40 investment strategy loses its luster, Vanguard recommends adjusting asset allocation

In the first week of the new year, the U.S. stock market was severely hit by a large sell-off. The rise in yields on U.S. government bonds put pressure on the stock prices of large tech companies, and the future tariff policies of President-elect Trump could complicate the Federal Reserve's plan to continue cutting interest rates in 2025, leading to increased concerns among investors. In this context, Vanguard, the world's second-largest asset management company, advises investors to rethink their long-standing portfolio allocation rules. Vanguard suggests replacing the classic "60% stocks + 40% bonds" combination with a more conservative fixed income allocation, known as the 60/40 investment strategy. Todd Schlanger, senior investment strategist at Vanguard, and Roger Aliaga-Diaz, Chief Economist of the Americas and Head of Global Investment Portfolio Construction, wrote in a blog post, "High interest rates and high equity valuations continue to imply a narrowing stock risk premium. Therefore, we are significantly overweight fixed income assets in our dynamic asset allocation portfolios compared to the 60/40 benchmark." Vanguard believes that in the current economic environment, adjusting asset allocations to a "40% stocks + 60% bonds" strategy may be more attractive. Schlanger stated in an interview that by adopting the 40/60 strategy, investors can achieve a better risk-return balance by investing more in bonds than stocks. He added, "This is a strategy about risk management. When the volatility of one asset class is much lower than the other, investors can achieve similar returns by taking on less risk." According to analysis by Manish Kabra, Head of U.S. Equity Strategy and Multi-Asset Strategy at Industrial Bank of France, the U.S. equity risk premium (the difference between stock returns and 10-year Treasury bond yields) dropped to 3% in January, hitting a "cyclical low." Historical data shows that in such cycles, bonds tend to outperform stocks in the subsequent 12 months. Kabra pointed out that ideally, the U.S. 10-year Treasury bond yield should be close to the trend of nominal GDP growth, which is currently around 5.2%. He believes this should be the benchmark for bond markets fearing economic growth prospects, as well as the starting point for U.S. Treasury bonds to become fundamentally attractive. As the stock risk premium shrinks, the additional returns of holding high-risk assets like stocks compared to holding ultra-safe assets like U.S. Treasury bonds are diminishing. Since Trump won the 2024 presidential election, long-term bond yields have risen significantly in the past two months. However, investors are concerned that some of the new president's policy plans could lead to an increase in the U.S. fiscal deficit and inflation, which would have adverse effects on the government bond market and once again push up interest rates. At the same time, a series of strong economic data released last week has also pushed up yields, weakening expectations for substantial Fed rate cuts this year. According to FactSet data, as of Wednesday, the yield on the U.S. 10-year Treasury bond was 4.454%, higher than 4.290% on November 5. The yield on the 30-year Treasury bond has also risen from 4.449% on election day to 4.927%. However, Schlanger stated that the Vanguard team still believes the traditional 60/40 portfolio is a "very consistent strategy" in the long run. But for investors looking to "deviate," overweighting bonds compared to the 60/40 strategy provides a better risk-return balance.