Forget 60/40—Vanguard Says Go 70% Bonds In Today's Market

Vanguard is recommending investors tilt heavily toward bonds, with a 70% allocation to fixed income, as high stock valuations and a historically low equity risk premium point to better long-term returns in the bond market. 

Vanguard's model portfolio, based on the Vanguard Asset Allocation Model, or VAAM, increased its bond weighting by 3 percentage points in July from the month before, expanding fixed income exposure to 70% and trimming equities to 30%, according to the firm's time-varying asset allocation report released last month. The shift moves further away from the traditional 60/40 portfolio split between stocks and bonds.

Don't Miss:

• The same firms that backed Uber, Venmo and eBay are investing in this pre-IPO company disrupting a $1.8T market — and you can too at just $2.90/share.
• ‘Scrolling To UBI' — Deloitte's #1 fastest-growing software company allows users to earn money on their phones. You can invest today for just $0.30/share.

The firm projects U.S. equities will deliver average annual returns of 3.3% to 5.3% over the next decade, compared with 4% to 5% for bonds.

Stocks at Stretched Valuations

The U.S. equity market rose 11% in Q2, led by large-cap technology and artificial intelligence stocks, according to the report. Developed markets outside the U.S. gained 13% in the same period, while emerging markets climbed 9%.

Despite recent gains, valuations remain well above fair-value estimates, with the Shiller cyclically adjusted price-to-earnings ratio near peaks last seen in 2021, 2000, and 1929 — years that preceded significant market declines, according to Business Insider.

“This conservative stance—relative to a 60% equity, 40% fixed income benchmark portfolio—reflects a historically low global equity risk premium, which continues to favor fixed income over equities,” Vanguard said in its report.

Trending: If there was a new fund backed by Jeff Bezos offering a 7-9% target yield with monthly dividends would you invest in it?

Higher Yields Shift Vanguard's Allocation Toward Bonds

With 10-year U.S. Treasury yields at 4.2%, investors may find more compelling risk-adjusted returns in fixed income.

The model portfolio, known as the time-varying asset allocation, is intended as an informational tool, free from real-world trading costs or tax considerations. Vanguard emphasized that the allocation is not a one-size-fits-all recommendation and that investor goals, risk tolerance, and personal circumstances should guide actual investment choices.

The VAAM framework, supported by projections from the Vanguard Capital Markets Model, updates allocations quarterly based on evolving market conditions. While the current setup favors bonds for the next decade, Vanguard said the mix will differ from quarter to quarter as its capital market forecasts evolve.

Read Next: 

• Kevin O'Leary Says Real Estate's Been a Smart Bet for 200 Years — This Platform Lets Anyone Tap Into It
• 2,000 High Earners Manage $6B With This AI Platform — Learn More

Image: Shutterstock