How I Made $5000 in the Stock Market

60/40 Funds Are Staging a Comeback. Here Are 3 Solid Choices.

Oct 29, 2025 01:00:00 -0400 by Ian Salisbury | #Asset Allocation #Feature

(Illustration by Allie Sullberg)

Slow-and-steady funds with a traditional 60% stocks/40% bonds mix are getting renewed attention for their recent outperformance. How to buy in.

Key Points

Imagine winning the Indianapolis 500 while driving the family minivan. It sounds crazy, but it isn’t far off the numbers put up this year by the American Balanced fund. The $270 billion fund is a classic 60/40 portfolio: Its mandate is to deliver slow and steady returns by keeping 60% of its assets in stocks and 40% in bonds.

So far this year, American Balanced is up 17.6%, handily beating the typical large-cap stock fund, which has returned 15.9%, according to Morningstar. That might not sound like a big win, but it is for a fund with only 60% of its assets pegged to the stock market.

While American Balanced is a standout, plenty of other 60/40 funds are delivering solid results. The $61 billion Vanguard Balanced Index fund, a bellwether for the group, has returned 14% this year. The average fund in Morningstar’s moderate-allocation category has returned 12.4%.

Those are impressive gains, considering the funds’ big helpings of bonds—the safety-first shock absorbers that make up a big part of their appeal to cautious investors. Over the past century, the 60/40 strategy has returned 7.7% a year on average, according to Vanguard. That’s far behind stocks’ 10.5%. But the 60/40 strategy has never lost more than 19% in a single calendar year, according to Vanguard’s data—while stock investors have seen maximum losses of more than 43%.

A strong year may be just what 60/40 funds need to win back investors who feel betrayed by recent underperformance. Many 60/40 investors are still smarting from a terrible experience in 2022, when the funds’ slow-and-steady strategy appeared to backfire. That was the year the Federal Reserve sharply hiked interest rates to fight runaway inflation, causing stocks and bonds to sell off in tandem. That year, 60/40 funds lost 14% on average, almost as bad as the S&P 500’s 18% decline.

The results in 2022 were “extraordinarily unusual,” says Paul Benjamin, principal investment officer of the American Balanced fund, which saw a loss of 11.8% that year. Coming off ultralow yields, steep rate hikes by the Fed led to the worst Treasury market losses on record. “Now we’re at a much more normal level of rates,” he says. “We’re unlikely to face a shock anything like that again.”

Studies support the notion that 2022 was an anomaly.

For instance, Morningstar found that, setting aside the 2022 debacle, investors in a 60/40 portfolio during 19 other bear markets since 1870 would have seen shallower declines and erased their losses more quickly than stock investors. “There was only one period that saw more pain for the 60/40 portfolio than for the stock market—the period we’re emerging from now,” the study concluded.

Today, 60/40 funds look well positioned. Stocks are on a tear, delivering annualized returns of nearly 25% over the past three years. The market is pricey, with the S&P 500’s price/earnings ratio at 23, well above the 10-year average of 19. That has revived talk of a bubble, earning comparisons to the late 1990s, when stocks were last valued so richly.

While the S&P 500 looks richly valued, however, it’s largely due to tech stocks commanding such a big part of it. The S&P 500 Equal Weight index is up 9.7% over the past year and trades at a more reasonable P/E of 17.

Bonds are better positioned than they were three years ago. Today, 10-year Treasuries yield just around 4%, compared with less than 1.5% at the start of 2022. That’s positive in two ways: It provides investors with more income to absorb declines in stock prices, and it gives the Fed more breathing room to cut rates.

The central bank appears set to cut rates four more times by the end of next year. That should give bonds a tailwind, since bond prices move in the opposite direction of interest rates.

For investors looking for a simple, low-cost fund, Vanguard Balanced Index is an obvious starting place. The mutual fund, which comes with a rock-bottom annual fee of 0.07%, offers broad exposure to U.S. stocks and investment-grade bonds.

Its 10-year average annual return of 9.4% places it in the top quintile among similar funds in Morningstar’s database—yet another point of confirmation that index funds beat most active ones.

The fund does have downsides. Its fixed-income portfolio is heavily tilted toward Treasuries, and it boasts an effective duration of about six years, which is longer than most peers and makes the fund more sensitive to interest-rate changes, according to Morningstar.

The fund’s stock portfolio is entirely U.S.-based. That has worked in the funds’ favor in recent years, as U.S. stocks handily outperformed international ones. But today, foreign stocks look attractive thanks to lower P/E ratios and a weak dollar, which increases the value of foreign profits to U.S. investors.

Vanguard investors looking for international exposure can try the Vanguard LifeStrategy Moderate Growth fund, which has about 25% of its portfolio invested abroad, but a slightly higher expense ratio of 0.13%.

Taking an active approach, American Balanced isn’t just a standout this year. Over the past decade, it has posted an average annual return of 10%, putting it in the top 10% of moderate allocation funds.

Looking at its portfolio, it isn’t hard to see why. The top five holdings are artificial-intelligence highfliers Broadcom, Microsoft, Taiwan Semiconductor Manufacturing, Meta Platforms, and Nvidia. That raises the prospect that the fund could get caught up in a tech-related selloff.

Benjamin, who oversees the fund as part of dozen-strong team, says the risks are justified by the revelatory experience of using artificial intelligence, which he likens to the lightning bolt of recognition he felt when he first witnessed the iPhone. “For the second time in my career, I feel like I am seeing something really obvious,” he says. “I’ve never seen a pace of improvement in the tech industry that’s as fast as what we are seeing with these large language models.”

Tech holdings represent 28% of the fund’s stock portfolio, below the S&P 500’s 36%. Sectors where the fund is overweight include industrials, materials, and consumer-defensive stocks, with names such as Philip Morris International, GE Aerospace, and Ingersoll Rand.

“Overall we have a fairly strong value and defensive bias,” says Benjamin. He adds that, despite this year’s outsize returns, the fund aims to keep pace in up markets while outperforming in down markets. “Our intention is, over a decade, to get a lot of outperformance—but all of it would come in down markets,” he says.

Another great option for investors willing to take an even bolder bet is the T. Rowe Price Capital Appreciation fund. The $71 billion fund’s 13.3% year-to-date return puts it in the middle of the pack for balanced funds. But its 11.3% annualized return over the past decade puts it in the top 1% in its Morningstar category.

The fund makes concentrated bets: It owns fewer than 50 stocks, compared with more than 200 for American Balanced and more than 3,000 for Vanguard Balanced Index.

T. Rowe’s fund is also banking heavily on tech, at a 39% weighting led by big names like Microsoft and Amazon.com. Co-manager David Giroux views them as somewhat defensive, allowing the fund to benefit from excitement around AI while providing a measure of safety, given their diversified businesses like cloud computing and Amazon’s enormous retail operation.

“If AI blows up, these aren’t going to be great stocks, but they are going to do 1,000 times better than some of the pure plays,” he says.

The fund employs a similar mix of caution and opportunism in its bond portfolio. Its effective duration is just under three years, far shorter than the category average of about five. Giroux worries that enormous U.S. budget deficits mean long-term Treasury yields could remain stubbornly high, even if the Fed cuts short-term rates. The upshot could be a more muted bond rally than in past Fed rate-cutting cycles.

Capital Appreciation’s more short-term bond orientation means that the fund might sacrifice some yield. Giroux makes up for that by taking on extra credit risk. About a third of its fixed-income holdings are in leveraged loans—floating-rate bank loans typically made to risky companies with below-investment-grade credit. It’s an unusual move for a staid 60/40 fund, although Giroux notes that the loans’ floating rates mean that they bear relatively little interest-rate risk, as does the fund’s overall bond portfolio.

“We take bigger bets than almost all of our peers,” says Giroux. “But we don’t take uncontrollable bets, and we’ve outperformed.”

Write to Ian Salisbury at ian.salisbury@barrons.com