Dynamic Asset Allocation: Adapting Portfolios Beyond Static 60/40

Key Quotes

"So very literally, you could say 60/40 is 60% equities, 40% bonds. That's the literal definition. But for some other people, they actually use it as a shorthand for a broad index portfolio. So it's not necessarily 60/40. So you might think it's a target allocation. It could be 100%, could be 80% equity and the rest in bonds. So it's more thinking, what does this mean? This is what it means."

Jumana Saleheen explains that the term "60/40 portfolio" can have different interpretations. Saleheen clarifies that while it literally refers to a specific allocation of 60% equities and 40% bonds, it is often used more broadly as a shorthand for a diversified portfolio that may not adhere to those exact percentages. This highlights the need for clarity when discussing asset allocation strategies.

"And actually the 60/40 in that year, 2022, did deliver negative returns. But guess what? It's 2025 and it's bounced back. We've seen it."

Jumana Saleheen addresses the performance of the 60/40 portfolio in 2022, a year marked by high inflation and rising interest rates. Saleheen notes that both stocks and bonds experienced declines, leading to negative returns for this traditional allocation. However, Saleheen points out that the portfolio has since recovered, demonstrating its resilience over time despite short-term volatility.

"The whole beacon of the 60/40 is that balance where if one thing goes down, the other thing is still giving you those returns. So that's basically the principle of diversification that Jack Bogle, our founder, spoke about, is have that balance so that when the stock market goes up and down, you have the bonds to give you that diversifier and that sort of anchor in your portfolio returns."

Jumana Saleheen elaborates on the fundamental principle behind the 60/40 portfolio's effectiveness. Saleheen explains that its core strength lies in diversification, where the performance of one asset class can offset losses in another. This balance, as espoused by Vanguard founder Jack Bogle, aims to provide stability and consistent returns by using bonds as a counterweight to stock market fluctuations.

"At one extreme, you can have a very narrative-based philosophy, right? You can tell stories about, oh, I think I have conviction. I see a lot of them on TV. I don't have any data, but I just have a really good feeling. My gut feeling tells me this. I'm going to make a call on this. So that's purely narrative-based. On the other side, you have very, very deep evidence-based systematic models, lots of data, lots of correlations between different market assets, right?"

Jumana Saleheen contrasts two approaches to investment strategy. Saleheen describes a "narrative-based" philosophy that relies on intuition and conviction without empirical data, often seen in media discussions. In contrast, Saleheen highlights "evidence-based systematic models" that utilize extensive data and analysis of market correlations to inform investment decisions. This distinction underscores the spectrum of methodologies available to investors.

"Another way to think about it is at times when you have different market views, you should change. You actually should change. So for example, right now, when we look at valuations and where they are in the US and in other parts of the world, we actually say the 60/40 becomes the 40/60."

Jumana Saleheen suggests that market conditions can necessitate adjustments to traditional portfolio allocations. Saleheen points to current valuations in the US and globally as a reason to consider shifting from a 60/40 equity-to-bond ratio to a 40/60 ratio. This indicates a dynamic approach to asset allocation based on evolving market assessments.

"I don't think it contradicts stay the course, right? I think stay the course means a few things. It's saying stay invested, right? So it says, you know, don't try to time the market. It's your time in the market. So stay the course means stay invested and don't get emotionally driven by events and make drastic changes which could lead to losses in your portfolio."

Jumana Saleheen clarifies that the concept of "staying the course" in investing does not preclude strategic adjustments. Saleheen explains that "staying the course" primarily means remaining invested and avoiding emotional decisions that lead to market timing attempts and potential losses. The focus is on maintaining a long-term perspective rather than reacting impulsively to market events.