Why the 60/40 Portfolio Is Back-And Poised for More Gains

The 60/40 portfolio-a globally diversified mix of 60% stocks and 40% bonds-has long been a cornerstone of prudent investing. After a turbulent 2022, when it declined by 16% amid inflationary shocks and rising interest rates, the strategy has staged a remarkable comeback. By September 2024, it had not only recovered but delivered a cumulative 29.7% return since year-end 2022, showcasing its resilience in a shifting macro environment. As we approach the end of 2025, the portfolio's strong Q4 performance-2% for the quarter and 16% year-to-date-further cements its relevance. This resurgence is driven by a confluence of falling stock valuations, rising bond yields, and the enduring power of diversification.

A Rebalance of Risk and Return

The 60/40 portfolio's revival is rooted in its ability to adapt to macroeconomic cycles. After years of stretched equity valuations, particularly in the U.S. market, stocks have become more attractive as of late 2025. According to Vanguard, falling valuations have improved the risk-return profile of equities, making them a compelling component of a balanced portfolio. Meanwhile, bond yields have climbed sharply, offering investors a buffer against equity volatility. The 40% bond allocation now generates higher income and acts as a stabilizer during market corrections, a critical feature in an era of persistent macroeconomic uncertainty.

This rebalancing of risk and return is further enhanced by the portfolio's diversification benefits. Historically, the 60/40 mix has delivered 10-year returns between 5.6% and 7.6%, demonstrating its effectiveness in balancing growth and stability. In Q4 2025, the portfolio's fixed-income component returned approximately 1%, while U.S. and international equities added 2% and 5% respectively, underscoring the value of a diversified approach even amid challenges like a prolonged U.S. government shutdown and elevated unemployment. As analysis shows, this performance highlights the portfolio's resilience.

Contrasting with Alternative Strategies

While Vanguard has recently advocated for a more conservative 40/60 mix due to stretched equity valuations and high interest rates, the 60/40 portfolio remains uniquely positioned for long-term gains. A 40/60 allocation may reduce risk, but it also caps upside potential in a market where equities-now undervalued-are poised for growth. The 60/40 strategy strikes a balance: it retains sufficient equity exposure to capitalize on market rebounds while leveraging higher bond yields to mitigate downside risk.

Critics argue that the 60/40 model is outdated in a low-growth, high-inflation world. However, the current macro environment-marked by falling stock valuations and rising bond yields-has reinvigorated its appeal. Bonds, once seen as a low-return asset, now offer yields that enhance portfolio resilience without sacrificing growth. This dynamic aligns with Vanguard's strategic asset allocation principles, which emphasize the importance of adapting to changing market conditions while maintaining a long-term perspective.

The Path Forward

The 60/40 portfolio's success in 2025 highlights its enduring relevance. By leveraging falling stock valuations, rising bond yields, and diversification, it has navigated a challenging macro environment with commendable returns. While alternative strategies like the 40/60 portfolio may appeal to risk-averse investors, the 60/40 model remains a robust choice for those seeking a balance of growth and stability. As markets continue to evolve, the key to long-term success lies in disciplined rebalancing and a steadfast commitment to diversification-a philosophy the 60/40 portfolio embodies.