MW How Vanguard defends a super-conservative strategy that has proved surprisingly controversial

By Barbara Kollmeyer

A 70% bond and 30% stock setup is the hottest new thing

Vanguard is liking the odds of returns for bonds over stocks in the next decade.

About a month ago, the world's second-biggest money manager ruffled feathers by suggesting investors turn the traditional 60/40 stock-to-bond setup on its head.

Vanguard, which manages $10.2 trillion in assets, announced that one of its strategies would now recommend a 70/30 bond-to-stock split. One critic on X went so far as to call that the "Great American Poverty" portfolio, while others envisaged potential retirees ravaged by inflation - the sworn enemy of fixed income:

In the hot seat with our call of the day is Vanguard's senior investment strategist Todd Schlanger, who explains that shift and why stocks may be the weaker bet over the next decade.

For starters, Schlander says the 70/30 advice is in one of 13 strategies - the long-term time-varying asset allocation portfolio (TVAA) - which keeps allocations unchanged over time. The stock side of that was at 38% in March, he said.

"What we were trying to do with this strategy is really identify the risk tolerance that an investor in a 60/40 portfolio would have in more or less normal market conditions," he told MarketWatch in an interview on Wednesday.

To get to 70/30, they first applied that risk tolerance to the current market environment, with a forecast of "more or less normal rates of return" for fixed income but elevated valuations for the U.S. and global stocks.

"You end up with a situation where our models would imply only taking on 30% equity risk instead of 60% and the remainder in fixed income," said Schlanger.

The equity side of it emphasizes some underdogs. "This particular strategy is tilted more towards value stocks, which are much more attractively priced than growth stocks, given the runup we've seen in the Mag 7," he said, referring to the big tech giants led by Nvidia.

That's as Vanguard also believes that AI growth has been transformative, but for some U.S. companies stocks "priced to perfection," he said. Small-caps and developed non-U.S. stocks are also a feature of that strategy shift. Those three areas offer "much more attractive valuation," and expectations for higher returns, he said.

Vanguard's expected 10-year annualized return on that 70/30 strategy is 5.5%, versus 5.2% for the benchmark 60/40 strategy. Expectations for annualized volatility are 5.9% versus 9.2%, respectively.

Schlanger said by following this time-bearing strategy, investors should almost expect it to underperform in the short run, because of the potential for strong momentum in markets and a difficulty in figuring out what would cause that to change.

"Part of the decision and the magnitude by which an investor might want to de-risk their portfolio would be their tolerance for underperformance should the momentum in the market continue," he said.

Schlanger said the strategy is not just about trying to earn excess returns, but managing risk. "That's why when you have very comparable rates of returns in equities and fixed income over the next decade, according to our forecasts, it just makes sense to overweight the asset class with less volatility and less potential for drawdown," he said.

"In this particular strategy the investor is trying to maximize the risk/return trade off, and again, when you have very comparable rates for equities and bonds, overweighting the less volatile asset class and also making the tilts towards more attractively valued-priced equities makes a lot of sense," he said.

The markets

Nasdaq-100 futures (NQ00) are down after Nvidia results, with small gains (ES00) (YM00) seen outside of that. Treasury yields BX:TMUBMUSD10Y BX:TMUBMUSD30Y are flat. Oil (CL00) is tilting south.

   Key asset performance                                                Last       5d      1m      YTD      1y 
   S&P 500                                                              6481.4     1.34%   1.86%   10.20%   15.90% 
   Nasdaq Composite                                                     21,590.14  1.97%   2.18%   11.80%   22.98% 
   10-year Treasury                                                     4.228      -10.20  -14.70  -34.80   36.30 
   Gold                                                                 3443.9     1.52%   3.49%   30.49%   35.64% 
   Oil                                                                  63.52      1.08%   -9.64%  -11.62%  -14.60% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

Nvidia (NVDA) results beat expectations overall, but its data-center business disappointed and the AI chip maker gave a tepid forecast for the current quarter. Shares are down around 2%.

Snowflake's (SNOW) AI data platform credentials got a boost and shares are jumping on forecast-beating results and an upbeat outlook.

NetApp stock $(NTAP)$ is down after the data-storage company reported lower profit. HP shares $(HPQ)$ edged lower although the PC maker reported in-line earnings and solid demand for AI-powered products.

At 8:30 a.m., there will be the release of weekly jobless claims and the first revision to second-quarter gross domestic product, followed by pending-home sales at 10 a.m.

Warren Buffett's Berkshire Hathaway $(BRK.B)$ boosted stakes in Japanese trading houses Mitsubishi (JP:8058) and Mitsui (JP:8031).

Best of the web

Record levels of margin debt aren't a red flag but long-term inflation is, says this fund manager.

Trump fires board member of regulator weighing rail merger.

Teacher salaries start at $100,000 at Bill Ackman's AI-focused Alpha School.

The chart

Deedy Das, principal at venture-capital firm Menlo Ventures, offers this chart via his X account, showing how TikTok owner ByteDance has just eclipsed Meta $(META)$ when it comes to revenue. ByteDance has reportedly planned a new employee share buyback plan, valuing it at more than $330 billion. Meta's market cap was $1.88 trillion as of Wednesday's close.

Top tickers

These were the top-searched stock-market tickers on MarketWatch as of 6 a.m.:

   Ticker  Security name 
   NVDA    Nvidia 
   TSLA    Tesla 
   PLTR    Palantir 
   NIO     NIO 
   OPEN    Opendoor 
   AMD     Advanced Micro Devices 
   AAPL    Apple 
   TSM     Taiwan Semiconductor Manufacturing 
   TLRY    Tilray Brands 
   AMZN    Amazon 

Random reads

Meet the 'punk rock' dinosaur.

Behind a one-in-a-million, viral tennis photo.

4.8 hours of sunshine. Calculating the perfect vacation.

-Barbara Kollmeyer

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

August 28, 2025 06:52 ET (10:52 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.