The Wall Street Journal wrote that despite what a crazy year in markets 2025 has been, moreso the first half I guess, investors who did nothing came out just fine. I'm getting better at remembering to use gift links. Overtrading or otherwise taking action in a very reactionary manner tends to impede long term progress. "Don't just do something, sit there" is a quote that I believe came from Jack Bogle. Barry Ritholtz writes about this idea every so often too.
Of course, along the way changes and tweaks should be made but if for whatever reason an investor totally misses something obvious, odds are pretty good they will get bailed out by time. Anyone able to make the occasional important change will make navigating the full market cycle a little easier but if they don't, proper asset allocation, no panic episodes and time will bail them out (repeated for emphasis).
All of that is a warmup for Vanguard recommending that investors flip from 60% equites/40% fixed income to 40/60 because they expect subpar equity returns for a while. This lines up with a 30/70 idea from them that we looked at in August. The 30/70 commentary seemed a little more abstract or think-tankish whereas this 40/60 we're talking about now is more of an actionable item from them.
This timing of this is pretty good in at least one respect. While they could end up being correct about what equities will do for the next few years, that is totally unknowable and little more than a guess. It may be a well researched and well thought out guess but still a guess as maybe equities rip higher for another year or three before Vanguard ends up being correct. But where the timing is good is that domestic stocks are at all time highs. This is not a reactionary call by them after a 20% decline. "Things are good, lighten up" is not a panicked decision. Maybe they're right, maybe they're wrong but they are not panicked.
The comments were not that interesting but a couple of people mentioned setting cash aside in case there is a serious decline, this is of course mitigating sequence of return risk. If you believe in setting aside cash to protect against an adverse sequence of returns, how much do you set aside? One commenter said five years worth which might be a bit much based on the duration of most bear markets which used to be 18-30 months but have been shorter lately. I think a couple of of years is prudent but to each his own. Depending though on how much you set aside in this context, you might be closer to 40/60 than you realize.
The following quote from Vanguard gives some color on what the objective here is.
“The bottom line is we don't get better returns from the 40/60 — we get the same return as the 60/40, but with much less risk.”
We obviously explore this all the time. A portfolio that captures 75% of the upside with only 50% of the downside will outperform over the long term. Actually pulling that off is very difficult but a portfolio designed to pursue that outcome has the potential for long term outperformance. Can 40/60 deliver something close to 75/50? If so, that becomes very compelling. The difficult part is captures 75% of the upside which will be very trying. It draws on "don't just do something, sit there." It requires building the portfolio you need and then letting the market's ergodic effect work for you...for the most part, save for the occasional tweak.
We spend a lot of time here building theoretical portfolios that I wouldn't suggest in real life but they can lead to influencing what we actually do. For example, there's no scenario where I think 30-40% in catastrophe bonds is a good idea but playing around with the concept helped me get to the point of figuring how to actually use them in portfolios and I've been pleased with the results.
If we just flip the weightings using the S&P 500 and 7-10 year treasuries, 40/60 has historically compounded a little better than capturing 75% of the upside. To the far left of the draw down chart, it captured more like 2/3rd of the downside, then 40/60 had a run of going down less than half of 60/40 during the 40 year one way trade for bonds and then you can see lately bonds haven't been as successful of a place to hide as rates went up and then treasuries became less predictable.
Here are a few variations on an idea to move toward what Vanguard is trying to accomplish with 40/60 that everyone would hate actually owning.
BLNDX is a client and personal holding. It blends global equities, not just domestic, and managed futures. I just used a generic buffer fund, the rest are self-explanatory and in portfolio 6, I broke out global equities and managed futures with separate funds. The results skew somewhat unfavorably because BLNDX has just sort of muddled this year and in 2023.
Buffer funds certainly have their potential drawbacks but keeping the conversation simple on those, anyone using them has to understand where the protection stops. A fund with a 15 or 20% buffer is going to be in a world of hurt if the market it tracks goes down 50%. There also can be some sensitivity to smaller declines inside the window of time (usually quarterly or annually) that gets made up when the product resets its buffer.
Part of Vanguard's thesis is that bonds with duration are again a good source of return. I am not willing to make that bet. With a flattish yield curve that has been steepening I don't think 4-5% is adequate compensation for 7-10 years from our backtest or further out in real life. Regardless of 60/40, 40/60 or any other split, the portion that might go into bonds can instead be diversified into many different things that offer the positive attributes of bonds without the idiosyncratic risk of some huge allocation into bonds.
The four portfolios we built for this post or anything you might come up with should be expected to lag, maybe by a lot, when equities rip higher. Vanguard is guessing that equities are not going to rip for the next several years. If they're right then some variation on 40/60 like we looked at today might look pretty good and if they're wrong then some variation on 40/60 like we looked at today will be very difficult to hold.
The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.
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