Key Points

• Portfolio diverisification can help long-term investors smooth returns.

• Global bonds offer a counterbalance to the volatility of global equities.

• A portfolio built based on past performance could result in a single-stock portfolio.

As investors constantly seek new and improved sources of returns, global stock/bond portfolios can attract criticism from proponents of alternative investment strategies.

Some commentators question the diversification benefits of global bonds relative to global equities; and the merits of a global equity market exposure versus a more concentrated position, say, in US stocks.

It’s an age-old debate and one that merits a diligent investigation.

We’ll start by looking at the merits of maintaining an exposure to global bond markets before analysing the equity diversification point.

Managing risk

A core tenet of the 60/40 model is the risk-reducing benefits of broad market diversification and the negative return correlation between global equity and bond markets, with bonds historically rising when stock markets fall by more than 10%¹. Critics of the 60/40 model might be quick to highlight the negative returns posted by global equity and bond markets in 2022.

The scenario that came to pass in 2022 represented the first time that both equities and bonds had experienced negative returns in the same year since 1977². This unwelcome positive correlation was driven largely by a sharp, unexpected increase in interest rates — but the negative relationship then resumed in 2023³.

While the case of 2022 was rare, when we look at the stock/bond return correlation over shorter time frames, we can see that the correlation can enter positive territory periodically⁴, typically in response to economic shocks or surprises.

The recent volatility in stock markets, fuelled by the US administration’s international trade tariffs, offered a real-time example of the role of global bonds in a diversified portfolio. At the end of April 2025, global equities were down 7% since the turn of the year, while global bonds were up 2%⁵.

Beyond the shock-absorbing benefits of global bonds, the higher interest rate environment has significantly improved the return outlook for bond markets. Long-term multi-asset investors can now expect higher returns from bond market exposures relative to the past 15 years⁶.

Do you need global diversification?

The outperformance of US equities in recent years might lead some investors to question the case for a globally diversified portfolio. After all, a €100 investment in US equities 10 years ago would have grown to €364 by the end of 2024 (an annualised 14% return) - more than twice the final balance of €175 (an annualised 6% return) for an equivalent investment in global ex-US equities⁷.

But with that logic in mind, why stop with global diversification? The same argument could apply to all levels of portfolio diversification. Looking at market results over the 10 years ended 31 December 2024, why bother with broadly diversified US equity exposure when US growth stocks outperformed the broad US market by 1.4 times (€513 versus €364)? Why invest in value stocks at all?

Or given that the information technology sector, in turn, outperformed growth stocks by 1.4 times, why not just concentrate the entire equity portfolio in that sector? And why not further weed out the underperforming parts of the sector? The Magnificent Seven outperformed the IT sector by 6.8 times⁸. And one stock, Nvidia, outperformed the collective return of the Magnificent Seven by 6.3 times. 

You can always find an asset that will outperform your portfolio

Past performance is not a reliable indicator of future results. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

Notes: Charts show the final balance of a hypothetical EUR100 investment in the relevant MSCI indices and in individual equities denominated in EUR for the 10 years ended 31 December 2024. Past performance is not a reliable indicator of future results.

Source: Vanguard calculations, based on MSCI indices and historical equity data from Bloomberg, as at 31 December 2024. Performance calculated in EUR with gross income reinvested.

Taking the past-performance argument as an investment guide to its logical conclusion reveals the argument’s fallacy - you end up with a one-stock portfolio.

Hedging the unknowable

Although diversification makes sense in any environment or time period, it may be particularly important now. Heightened geopolitical uncertainty is feeding into markets and volatility is likely to persist for some time.

Portfolio diversification with a strategic allocation to fixed income is one of the most potent strategies investors have to smooth portfolio returns over the long term. While market downturns are inevitable, patience and a steadfast commitment to your long-term investment strategy are crucial.

Sometimes, the most effective solutions are the simplest. A strategic allocation to global equities and global bonds has been found to give long-term investors a good chance of success⁹.

¹ Source: Bloomberg. Data are monthly total returns in USD from 01 January 1990 to 30 April 2023. Global equities are represented by the MSCI ACWI Index. Global bonds are represented by the Bloomberg Global Aggregate Index Value (USD Hedged). An equity market downturn is defined as a decrease of more than 10% from the previous maximum.

² Source: Bloomberg. Note: Annual total returns calculated in USD from 1977 to 2022. For equities, we use US equities represented by the MSCI USA Index from 1977 to 1987 and global equities afterwards, represented by the MSCI ACWI Index. For bonds, we use US bonds represented by the Bloomberg U.S. Aggregate Index from 1977 to 1990 and global bonds afterwards, represented by the Bloomberg Global Aggregate Index Value (USD Hedged).

³ Source: Vanguard calculations in USD based on data from Refinitiv. Data between 1 January 2022 and 5 April 2023. Stocks are represented by the S&P500 Price Index and bonds are represented by the S&P Treasury Bond Current 10 Years Index. Data as at at 17 January 2025.

⁴ Source: Vanguard calculations in USD, based on data from Refinitiv, as at 17 January 2025. Correlation of daily global stock and bond returns over 60 business days and over 504 business days since 1 January 2002. Stocks are represented by the S&P 500 Price Index  and bonds are represented by the S&P Treasury Bond Current 10 Years Index. It is not uncommon for the correlation between stocks and bonds to turn positive over the shorter term, but this has not altered the longer-term negative relationship.

⁵ Vanguard calculations based on Bloomberg data. Global equities represented by the FTSE All-World Index EUR. Global bonds represented by the Bloomberg Global Aggregate Float-Adjusted Index EUR Hedged. Data between 1 January 2025 and 29 April 2025.

⁶ Source: Vanguard calculations based on the Vanguard Capital Markets Model (VCMM). Global bonds based on the Bloomberg Global Aggregate Index (EUR Hedged). Distribution of 10-year annualised return outcomes in EUR from the VCMM are derived from 10,000 simulations for each modelled asset class.

⁷ Returns in all the scenarios are based on our calculations using the relevant MSCI indices denominated in EUR over 10 years ended 31 December 2024.

⁸ The Magnificent Seven are the seven stocks that have driven much of the market’s returns over the past few years: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla.

⁹ For example, see Gary P. Brinson, L. Randolph Hood, and Gilbert L. Beebower, 1995. ‘Determinants of portfolio performance.’ Financial Analysts Journal 51(1):133–8. (Feature Articles, 1985–1994).

IMPORTANT: The projections or other information generated by the Vanguard Capital Markets Model® regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. VCMM results will vary with each use and over time. The VCMM projections are based on a statistical analysis of historical data. Future returns may behave differently from the historical patterns captured in the VCMM. More important, the VCMM may be underestimating extreme negative scenarios unobserved in the historical period on which the model estimation is based.

The Vanguard Capital Markets Model® is a proprietary financial simulation tool developed and maintained by Vanguard’s primary investment research and advice teams. The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include US and international equity markets, several maturities of the US Treasury and corporate fixed income markets, international fixed income markets, US money markets, commodities, and certain alternative investment strategies. The theoretical and empirical foundation for the Vanguard Capital Markets Model is that the returns of various asset classes reflect the compensation investors require for bearing different types of systematic risk (beta). At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly financial and economic data from as early as 1960. Using a system of estimated equations, the model then applies a Monte Carlo simulation method to project the estimated interrelationships among risk factors and asset classes as well as uncertainty and randomness over time. The model generates a large set of simulated outcomes for each asset class over several time horizons. Forecasts are obtained by computing measures of central tendency in these simulations. Results produced by the tool will vary with each use and over time.

The primary value of the VCMM is in its application to analysing potential client portfolios. VCMM asset-class forecasts—comprising distributions of expected returns, volatilities, and correlations—are key to the evaluation of potential downside risks, various risk–return trade-offs, and the diversification benefits of various asset classes. Although central tendencies are generated in any return distribution, Vanguard stresses that focusing on the full range of potential outcomes for the assets considered, such as the data presented in this paper, is the most effective way to use VCMM output.

The VCMM seeks to represent the uncertainty in the forecast by generating a wide range of potential outcomes. It is important to recognise that the VCMM does not impose “normality” on the return distributions, but rather is influenced by the so-called fat tails and skewness in the empirical distribution of modeled asset-class returns. Within the range of outcomes, individual experiences can be quite different, underscoring the varied nature of potential future paths. Indeed, this is a key reason why we approach asset-return outlooks in a distributional framework.

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. The performance data does not take account of the commissions and costs incurred in the issue and redemption of shares.

Any projections should be regarded as hypothetical in nature and do not reflect or guarantee future results.

Important information

For professional investors only (as defined under the MiFID II Directive) investing for their own account (including management companies (fund of funds) and professional clients investing on behalf of their discretionary clients). Not to be distributed to the public.

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The information contained herein is for educational purposes only and is not a recommendation or solicitation to buy or sell investments.

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