Core Insights - The 60/40 investment strategy, rooted in Harry Markowitz's modern portfolio theory, advocates for a mix of 60% equities and 40% fixed-income securities to balance risk and return [1][2][3] Historical Context - The 60/40 portfolio gained popularity in the early 1990s, becoming a standard interpretation of modern portfolio theory, appealing to both individual and institutional investors [3] - Historical analysis by Morningstar indicates that the 60/40 portfolio has been less painful during market downturns compared to equities alone, particularly during the Great Depression and the Lost Decade of the 2000s [4][5] Recent Developments - The year 2022 marked a significant shift as both equities and bonds faced simultaneous declines due to geopolitical tensions from Russia's invasion of Ukraine and supply chain disruptions from the COVID-19 pandemic, leading to rising inflation [6] - As of September 2024, while the stock market has recovered its 2022 highs, the bond market remains underperforming due to ongoing aggressive interest rate hikes by the Federal Reserve that began in March 2022 [7]

Investment Strategy - Vanguard is implementing a 40/60 asset allocation strategy, deviating from the traditional 60/40 approach [1] - The 40/60 strategy involves underweighting equities due to expectations of lower returns driven by higher valuations in the equity market over the next decade [2] - Time-varying asset allocation strategies are updated quarterly and aim to achieve a better risk-return trade-off by managing market opportunities and risks [3][4] Portfolio Composition - Vanguard's time-varying asset allocation is tilted towards value stocks over growth stocks, developed markets over emerging markets, and longer duration government bonds over corporate bonds [5] - The strategy anticipates that rates will likely decline, at least in the shorter term, over the coming years [5] Risk Management - The 40/60 strategy aims to reduce risk and volatility compared to the classic 60/40 portfolio [6][7] - Recent updates show similar returns between the 60/40 and 40/60 strategies, but the 40/60 offers more favorable annualized volatility and drawdown potential [7]