Your 60/40 Portfolio Will Gain 3.5% Thanks to Bond Market Returns, Says Quant Giant

Quant giant AQR Capital Management has upgraded its expectations for the performance of a 60/40 portfolio in the years ahead, saying the classic investing approach is set to benefit from rising returns in the bond market.

The $114 billion money manager now anticipates the real return of a global 60/40 strategy — which splits a portfolio into 60% equities and 40% bonds — in the next five to 10 years will be 3.5%, up from a previous projection of 3.2%. 

While that’s below the long-term average of roughly 5% since 1900, it’s well above the record low expectations hit in 2021.

The upgrade is laid out in AQR’s latest Capital Markets Assumptions, an annual report featuring its projections for a slew of assets on a medium term investment horizon. This year, the firm has raised its return expectations across bonds and US credit, while slightly reducing forecasts for American stocks, cash and emerging-market equities.

The report has echoes of a year ago, when AQR similarly boosted its expectations for bond returns and trimmed them for equity performance. Since then, the Treasury market has experienced tremendous volatility, while the stock market has rallied to multiple record highs. 

The latter helped a classic 60/40 approach deliver double-digit gains in 2024, but has left equities looking pricey. Since the expected returns for stocks have remained fairly constant, that implies “a world of compressed risk premia at the start of 2025,” AQR wrote. That’s especially true in the US.

“According to our framework, the US has a sizeable growth advantage over other developed countries, but not nearly as much as priced by markets, giving it the lowest expected real and excess return,” the Greenwich, Connecticut-based firm wrote.

The Cliff Asness-founded asset manager cited research showing that one-off tax cuts and interest rate reductions explain nearly half the earnings growth in the three decades through 2019 — factors that may not exist moving forward.

“Some tailwinds may continue , while others may be just getting started , but it’s unclear how long they will last,” AQR said.

AQR emphasizes that its estimates are highly uncertain and intended to assist investors with setting medium-term expectations, rather than for timing their investments.

With assistance from Justina Lee.

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