By Mohneet Dhir, multi-asset product specialist, Vanguard Europe


  • Asset allocation drives the majority of long-term returns, not security selection.
  • Tactical approaches to asset allocation are difficult to get right and can leave investors further away from their long-term goals.
  • Most investors are well-served by a long-term, strategic exposure to global equities and bonds. The hard part is sticking to it through the ups and downs of markets.


For most investors, achieving long-term financial goals doesn’t have to be complicated. Studies have found, time and time again, that a strategic allocation to global equities and global bonds gives long-term investors a good chance of success1.

The hard part can be sticking with a strategic approach to asset allocation through the ups and downs of investment markets and maintaining a long-term perspective.

When markets are more volatile and portfolio values drop, as we’ve experienced over the past year or so, some investors might be tempted to take a tactical approach to asset allocation. That could mean investing client savings in a flexible allocation fund or manually rebalancing client portfolios tactically to gain more exposure to equity or bond markets.

Although tactical allocation decisions might be well-intentioned, they are very difficult to get right consistently and risk putting investors further away from their long-term goals. 

When we analyse the steps that make a tactical move successful, investors need to make the right decision on five different occasions for each move to succeed. That’s why a strategic approach to asset allocation offers long-term investors a better chance of achieving investment success – especially when markets are more volatile and timing becomes even more difficult. 

Picking the right allocation for clients

Given the importance of asset allocation in helping long-term investors achieve to their goals, identifying the appropriate mix for clients is arguably among the most important investment interventions an adviser will make.

Whether advisers construct multi-asset model portfolios for clients manually or if client savings are put into an all-in-one multi-asset solution, the appropriate exposure to equity and bond markets will be very different for a client with 30 years of saving ahead of them compared to a client with shorter horizons. Broadly speaking, clients with longer-term horizons may be better suited to higher equity market allocations of, say, 80% or 100%, while those with a shorter timeframe, such as clients in or approaching retirement, may be more suited to a 40% or 20% equity allocation, with global bonds making up the majority of the portfolio.

Why the 60/40 model delivers value

Traditional multi-asset portfolios of stocks and bonds, sometimes called the 60/40 model, hinges on investors accepting the trade-off between risk and reward, and appreciating the historical characteristics of different types of investment. We can’t control what happens in markets but understanding the historical return patterns of equities and bonds can help manage risk in client portfolios.

The graph below shows the rolling correlation of daily stock and bond returns over both 60 business days and over two-year periods since 2000. As the chart shows, over two-year periods, the return correlation between stocks and bonds has been largely negative or close to zero for the past 20 years or so, but it is not uncommon for the return correlation to turn positive over shorter time frames.

Short and long-term stock and bond return correlation


Past performance is not a reliable indicator of future results.

Source: Vanguard calculations in EUR, based on data from Refinitiv. Data between 1 January 2000 and 22 March 2023.

Notes: The chart shows the correlation of daily stock and bond returns over 60 business days and over 504 business days since 1 January 2000. Stocks are represented by the MSCI EMU Total Return Index and bonds are represented by the Bloomberg Euro-Aggregate Bond Index. Data for the Bloomberg Euro-Aggregate Bond Index starts on 31 July 1998, which is why the line for the 24-month rolling correlation only starts on 6 July 2000.

That’s why, for long-term investors, we advocate an allocation to bonds as part of a multi-asset portfolio, because bonds have historically offered some protection from equity market downturns. It would be remiss not to acknowledge the double fall of both stock and bond markets in 2022, but occasionally this can happen before the negative return correlation between equities and bonds reasserts itself2. Indeed, global bond prices rose in the first half of March as global equities sold-off3.

There may still be volatility in 2023 as markets remain sensitive to monetary policy expectations and fresh macroeconomic data, but the longer-term outlook for 60/40-style portfolios has improved thanks to higher income returns for long-term bond investors and fairer equity valuations.

Maintaining discipline

Once an adviser has established a framework for their client’s portfolio by aligning the asset mix with their client’s long-term goals and objectives, the next step is maintaining that asset allocation through different market environments (for as long as the mix remains in line with the client’s objectives and risk profile).

That is why strategic or target-allocation ETFs maintain a consistent, predetermined exposure to stocks and bonds through time and market events with the help of periodic rebalancing back to the initial asset allocation.

Over time, a client’s circumstances and personal objectives may change. They may decide they want to retire earlier, take a sabbatical, buy a new property or provide financial support for a relative, for example. Such changes to a client’s financial goals may require adjustments to their investment strategy, including in rare cases shifting their portfolio’s asset allocation.

Asset allocation is at the heart of achieving investment objectives but it works best if you stick to it over time, through varying market environments. That means staying the course when markets fall and portfolios suffer losses. Selling assets when markets take a hit means realising losses and forgoing any future returns that those assets could deliver.


1 See Wallick, D.W., Shanahan, J., Tasopoulos, C., and Yoon, J., 2012. “The Global Case for Strategic Asset Allocation”, Vanguard Research, and Brinson, G.P., Hood, L.R., and Beebower, G. L., 1986. “Determinants of Portfolio Performance”, Financial Analysts Journal, 42(4): 39–44.

2 See Renzi-Ricci, G. and Baynes, L., 2021. “See Hedging equity downside risk in the low-yield environment”. Analysis of global equity and aggregate bond performance during equity bear markets and corrections between January 1988 to November 2020. Calculated in EUR. Equity returns are defined from the MSCI AC World Total Return Index and bond returns defined from the Bloomberg Barclays Global Aggregate Total Return Index, hedged to EUR.

3 Source: Vanguard calculations, based on Bloomberg data. Data between 1 March 2023 and 20 March 2023. Global equities represented by the FTSE All-World Index. Global bonds represented by the Bloomberg Global Aggregate Float Adjusted and Scaled Index. Price returns denominated in EUR. 

Investment risk information

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

Past performance is not a reliable indicator of future results.


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