The traditional 60/40 portfolio can still be a useful portfolio model, but it's not a "one-size-fits-all" solution that works for everyone, according to Todd Schlanger, a senior investment strategist at Vanguard.

For example, he says in an essay published by Vanguard last week, it is not the best choice for people in their 20s and their 60- to 70-year investment time horizon, 

"They would likely benefit from more equities to grow their portfolio over the long run. It’s a good starting place, but an investor will need to tailor a portfolio to their needs,” Schlanger wrote in the essay, which focused on common misconceptions of the 60/40 portfolio.

The other main points to remember about the 60/40, he said, is that it's highly customizable and not a "set-it-and-forget-it" solution. The essay followed one he cowrote in March that stressed that the 60/40 model, after a rough 2022, has an improved outlook for the next decade.

“The 60/40 is that middle-of-the-road portfolio that reflects the typical investor’s asset allocation, so it’s often used as an example in industry research,” Schlanger said in last week's article. “It’s a good proxy because many institutions have historically used this allocation to meet their objectives," he said. "But that’s not to say that 60/40 is any better than a 40/60 or 90/10 portfolio for investors who need a more conservative or more aggressive portfolio for their goals, time horizon, and risk tolerance."

The 60/40 asset-allocation formula has received a lot of criticism in recent years, primarily during periods of market turbulence. In September 2021, for instance, Vanguard strategists Boyu (Daniel) Wu, Beatrice Yeo, Kevin DiCiurcio and Qian Wang wrote, “Faith in the traditional 60% stock/40% bond portfolio has been shaken further in recent months as a step-up in inflation and interest rates threatens to violate the negative stock/bond correlation underpinning the diversification properties of a multi-asset portfolio.”

In March, DiCiurcio and another Vanguard investment strategist, Ian Kresnak, noted that 2022 was a particularly terrible year for the 60/40 asset-allocation model.

“Higher inflation [offset] some of a balanced portfolio’s diversification benefits,” they wrote, noting that the rapid rise in prices was causing stocks and bonds to perform more or less in lockstep. And not well. The typical 60/40 portfolio declined roughly 16% in 2022, they said.

So what are retirees, pre-retirees, and their advisors supposed to do if they want to construct a sound, well-balanced portfolio that will go the distance?

For traditionalists, the good news is that the outlook for the 60/40 portfolio has become much better. “The old standby’s long-term record has been stellar and, with current valuations, expected returns for the next decade have improved,” Schlanger and his colleague Ziqi Tan wrote in March.

But Schlanger now emphasizes that it’s not a a portfolio model that's meant for all situations and all clients.

What’s more, he stressed, there are many ways to implement a 60/40 strategy.

For instance, he said, the stock and bond mix no longer has to be all U.S.-traded securities because international markets are more accessible than ever. Alternative investments such as private equity or commodities can also enhance the risk-return portfolio, he added, though investors must be sure to consider potentially higher costs, illiquidity issues and other complexities involved with these nontraded assets.

Moreover, whatever assets and asset allocations one chooses, Schlanger recommends regular monitoring and possibly rebalancing.

“The simplest way to implement a 60/40 portfolio is through a single fund option because you won’t need to rebalance it over time—that’s done by the fund’s portfolio manager,” he wrote.

Even so, he added, certain clients might want a different allocation model as their situation changes. If they feel more aggressive they might want more stocks or even more risky stocks, such as rapid growth tech companies. If they become more risk-averse, however, the opposite might be true. In such cases, they might prefer 60% fixed income, perhaps to take advantage of high interest rates, and just 40% equities.

Portfolio reviewing and rebalancing is especially crucial for clients who have multiple funds or asset types, he said.

“Life happens. Things change. Your financial situation and goals may have evolved since you first selected that target asset allocation years or decades ago,” he wrote. “There’s nothing wrong with changing your investment strategy, as long as it’s driven by careful consideration, not by market noise.”

Yet another reason to periodically rebalance has to do with market forces more than changes in preference or attitude, he wrote. In a bull market, your equity values may grow significantly and, after a time, they may now represent 70%, say, or more of your portfolio’s worth. If you want to keep equities at 60%, you’ll have to sell off some or buy more fixed income securities to reestablish the right mix.

How often clients should perform this review and rebalance exercise, however, is another open-ended question.

“There are multiple approaches for when to rebalance—calendar-based, threshold-based, or a combination of the two,” said Schlanger. “For most investors, rebalancing on an annual basis is adequate.”