The balanced stock-bond portfolio is defying the widespread argument that it is no longer an appropriate approach

The classic 60% stock, 40% bond portfolio is outperforming its historical average so far this year.

You read that right: Despite a chorus of criticism over the last few years, which in recent weeks has reached a crescendo, the 60/40 portfolio is more than holding its own this year.

Since 1794, a yearly rebalanced 60/40 portfolio produced a total return of 7.2% annualized through the end of 2025, according to a database compiled by Edward McQuarrie, professor emeritus at Santa Clara University's Leavey School of Business.

In contrast, this year through Aug. 4, the 60/40 portfolio was sitting on an annualized gain of 13.4% (assuming the stock portion was invested in the Vanguard Total Stock Market ETF VTI and the bond portion in the Vanguard Long-Term Treasury ETF VGLT.) The 60/40 portfolio also is an above-average performer this year in real, inflation-adjusted terms: 9.4% annualized year to date, versus 5.5% annualized since 1794.

The 60/40 portfolio's above-average year-to-date performance hasn't prevented skeptics in recent days from declaring that the approach is - if not outright dead - seriously broken (as you can read here and here). Their arguments fall into several categories, and let me address each in turn.

Stocks are overvalued

While it is true that stocks are overvalued, this argument cuts both ways.

On the one hand, stocks historically have produced lower returns, on average, in the wake of overvaluation. And that certainly creates headwinds for the 60/40 portfolio.

Yet, on the other hand, a belief that the stock market will fall is also why you would want to reduce your risk by allocating a healthy portion to bonds. Wes Crill, a vice president at Dimensional Fund Advisers, said in an interview that a 60/40 portfolio's volatility over the last 50 years has almost always been between 20% and 40% less risky than that of an all-stock portfolio (when measured based on trailing 36-month standard deviations).

Bonds are overvalued

It is true that bonds won't provide much diversification benefit if their performance is just as bad as stocks.

Yet it's not clear that bonds are overvalued, despite the widespread belief that inflation is going to get worse in coming years. The inflation that the bond market currently expects in coming years is already reflected in bond prices; if the market is right in its expectation, then bonds will still provide positive real returns in the future. The inflation threat that bonds face isn't from inflation that is currently expected but from unexpected inflation - which, by definition, is unexpected.

So, all we have to go on when predicting bond returns is their history. And Professor McQuarrie reports that bonds, on average since 1794, have not underperformed stocks by anywhere near the amount that most on Wall Street believe. Over the entire 19th century, in fact, U.S. bonds slightly outperformed U.S. stocks.

McQuarrie summarizes the lessons of history as follows: A 60/40 portfolio "might not produce any less return than a 100% stock portfolio. It might even produce somewhat more wealth if stocks go through a bad stretch. Conversely, a 60/40 portfolio will almost certainly be less volatile than a 100% stock portfolio. ... In the absence of certainty that stocks will outperform bonds, combined with the near certainty that a balanced portfolio of stocks and bonds will be less volatile than a 100% stock portfolio and subject to more shallow drawdowns, a balanced [stock-bond] portfolio becomes a viable option for any investor."

The stock-bond correlation is increasing

It is true that the stock-bond correlation has increased in recent years, as you can see from the accompanying chart. And it's also true that a higher correlation does reduce the diversification benefits of allocating a portion of an erstwhile all-stock portfolio to bonds.

Yet the chart also shows that the stock-bond correlation is strongly mean-reverting: High correlations have consistently been followed by low correlations, and vice versa. You therefore should not be surprised by what I found upon analyzing stock and bond returns back to 1794: The trailing five-year stock-bond correlation is not related in any statistically meaningful way to the 60/40 portfolio's expected performance over the subsequent five years.

The bottom line? Reports of the 60/40 portfolio's demise are premature.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.

-Mark Hulbert