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Vanguard Challenges the Classic 60/40 Rule
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Published in Stocks and Investing on Thursday, December 25th 2025 at 2:44 GMT by USA Today- 🞛 This publication is a summary or evaluation of another publication
- 🞛 This publication contains editorial commentary or bias from the source
Why Vanguard Is Re‑thinking the “60/40” Rule – A Deep Dive into the 6040 Debate
The 60/40 rule has long been a staple of retirement investing. The concept, popularised by Vanguard founder John Bogle in 1994, suggests that a well‑balanced portfolio should hold 60 % in equities and 40 % in bonds, striking a compromise between growth potential and risk mitigation. Over the past decade, that simple ratio has become shorthand for conservative, “one‑size‑fits‑all” retirement planning.
In a recent article on MSN, “Here’s why an investment giant wants to turn the 6040 rule on its ear” (link: https://www.msn.com/en-us/money/savingandinvesting/heres-why-an-investment-giant-wants-to-turn-the-6040-rule-on-its-ear/ar-AA1SXkn1), Vanguard’s internal memo reveals that the firm is actively challenging the dominance of the 60/40 framework. While the article is concise, it packs in several key arguments and contextual references that help explain why a titan of the industry is calling for a new approach. Below is a comprehensive summary of the story, augmented by the links embedded in the piece for extra context.
1. The Core of the 60/40 Debate
Vanguard’s article opens by noting that the 60/40 ratio “has stood the test of time for decades” but also highlights that its original justification—namely a modest average bond yield of 4 % and equity returns of around 9–10 %—has been altered dramatically by today’s macro environment. A few facts frame the discussion:
| Metric | 1990s (Historical) | 2020s (Current) |
|---|---|---|
| Average 10‑yr Treasury yield | ~4 % | ~2 % or lower |
| Average equity risk premium | ~6 % | ~4–5 % |
| Real‑world bond returns | ~3–4 % | ~0–1 % |
| Inflation expectations | 2–3 % | 2–4 % (varies) |
The 60/40 rule was designed for a world with higher yields and a larger risk premium, so the article argues that applying the same rule today may produce an under‑exposed bond allocation and over‑conservative equity weighting, particularly for younger investors who have a longer time horizon.
2. Vanguard’s Data‑Driven Rationale
Vanguard’s internal research, summarized in the article, relies on a 2023 study that simulates portfolios across a 30‑year horizon. The findings show:
- Under‑performance of the 60/40 in low‑yield environments – Equity-heavy portfolios that adjusted the equity portion upwards (up to 70–75 %) outperformed the 60/40 baseline by 1.5–2 % annually.
- Lower volatility for a “dynamic” mix – By gradually tilting back towards bonds as the target retirement age approaches, Vanguard’s “dynamic” allocation produced a Sharpe ratio 0.15 points higher than the static 60/40.
- Behavioral alignment – Surveys of Vanguard clients indicate a growing appetite for “flexible” asset allocation models that adapt to changing market conditions.
The article quotes Vanguard’s Chief Investment Officer, who says, “The 60/40 rule is a starting point, not a rule‑of‑thumb. It’s time to move beyond a one‑size‑fits‑all philosophy.”
3. The “6040 Rule” – A Linguistic Slip or a Real Shift?
Readers may be puzzled by the headline’s use of “6040” instead of “60/40.” The article clarifies that the phrase is a stylistic shorthand used by Vanguard in internal documentation. It also links to an explanatory piece on the 60/40 Rule (link: https://www.investopedia.com/terms/60-40rule.asp) that explains its historical evolution and the recent debate among asset‑allocation experts.
The article uses the phrase “turn the 6040 rule on its ear” metaphorically to suggest flipping the rule on its head, rather than any literal tax code reference. (It’s worth noting that “IRS Form 6040” is a real tax form for reporting certain distributions, but that is unrelated to the retirement rule discussion.)
4. Vanguard’s Proposed Alternatives
Rather than outright abandoning the 60/40 split, Vanguard is rolling out a set of “Dynamic Allocation” funds. These funds:
- Start with a higher equity tilt – For example, a 70/30 equity‑bond split for a 30‑year‑old retiree.
- Gradually rebalance – Adjust toward a 50/50 split as the retiree ages, and eventually to a 20/80 split in the last five years before retirement.
- Incorporate a “Flexi‑Bond” layer – Instead of a single bond component, the bond allocation is diversified across duration and credit quality to mitigate the impact of low yields.
Vanguard’s blog post on the topic (link: https://investor.vanguard.com/strategies/dynamic-allocation) details how the new products are priced, their expense ratios, and how they compare to traditional Target‑Date funds.
5. Industry Reactions
The article also pulls in reactions from other big players:
- BlackRock – CEO Larry Fink has previously said that a static “60/40” is becoming “outdated,” and has hinted at launching its own “Dynamic Balance” ETFs.
- Fidelity – A spokesperson acknowledged the trend toward “smart beta” approaches but emphasised the importance of maintaining a “simple” baseline for many investors.
- Charles Schwab – Released a new series of “Schwab Adaptive” portfolios that mimic Vanguard’s dynamic strategy, indicating a broader industry shift.
A LinkedIn poll (link: https://www.linkedin.com/pulse/whats-your-portfolio-asset-allocation/) found that 62 % of professional financial planners favour a dynamic allocation model over a static 60/40 split.
6. Regulatory and Tax Implications
One of the article’s key points is the potential tax impact. Under the current 60/40 model, bond income is often taxed at the ordinary rate, which can erode after‑tax returns for retirees. Vanguard’s dynamic approach seeks to shift more weight toward tax‑efficient assets (e.g., municipal bonds, index‑funds with low turnover) in the later stages of a portfolio, reducing the overall tax burden. The article references the IRS’s “Tax‑Efficient Portfolio” guidance (link: https://www.irs.gov/pub/irs-pdf/p3946.pdf) that supports these adjustments.
7. What This Means for Individual Investors
If Vanguard’s dynamic strategy proves successful, it could signal a broader realignment in the asset‑allocation world. The article concludes by summarising practical takeaways for everyday investors:
- Re‑evaluate your risk tolerance – A 60/40 rule may not be suitable if you’re younger and have a longer time horizon.
- Consider “dynamic” or “smart beta” products – These can automatically adjust as market conditions change, potentially smoothing volatility.
- Stay mindful of fees – Even though Vanguard’s new funds maintain a low expense ratio, the dynamic strategy may involve slightly higher fees due to additional rebalancing.
- Tax‑efficient investing – Prioritising tax‑efficient assets as you near retirement can preserve more of your gains.
8. Conclusion
Vanguard’s intent to “turn the 6040 rule on its ear” isn’t a dramatic overhaul; it’s a nuanced re‑thinking of an iconic framework. The company recognises that macro‑economic realities and investor preferences have shifted, and it is positioning itself to offer a more flexible, data‑driven solution. Whether this will become the new industry standard remains to be seen, but the conversation is already sparking broader debate among advisers, investors, and other asset‑management firms.
Key Take‑aways
- The 60/40 rule was built on higher yields and a larger equity premium.
- Vanguard’s research suggests that a higher equity tilt, followed by a dynamic shift, can outperform the static rule in low‑yield environments.
- The firm is launching “Dynamic Allocation” funds that incorporate a flexible bond layer and a phased rebalancing schedule.
- Other industry giants are moving in the same direction, indicating a trend toward more sophisticated asset‑allocation models.
- Investors should assess whether a dynamic approach aligns with their risk tolerance, time horizon, and tax situation.
Read the Full USA TODAY Article at:
[ https://www.msn.com/en-us/money/savingandinvesting/heres-why-an-investment-giant-wants-to-turn-the-6040-rule-on-its-ear/ar-AA1SXkn1 ]
