After a period of relative market calm, market events of the last few years have led some to call into question the viability of traditional ‘balanced portfolios’ such as those containing 60% shares and 40% bonds1. Cash delivered record returns and bonds fell in tandem with shares in 2022, while US shares continue to outpace stock markets elsewhere. 

The speed at which the landscape changed, as central banks attacked inflation with higher interest rates, serves as a strong reminder of why investors need to resist the temptation to chase performance and why portfolio diversification remains as important as ever. Diversification means spreading your risk across asset classes (different investment types like shares and bonds) as well as countries, regions and industry sectors.


US shares2 have contributed to much of the global market performance since the global financial crisis in 2008 – 2009.  The low interest rate environment, rising valuations (the market’s view of how much a company is worth) and high earnings (profits) in the US saw the country’s shares return almost twice as much as global shares excluding the US over the past decade. 

US shares continue to be a strong performer, but the drivers of that outperformance over the last decade have likely sown the seeds for more muted performance over the coming one. With shares looking overvalued and a slowdown in earnings growth, we’re forecasting annualised returns3 of 3.5%–5.5% for US shares4 over the next decade for UK investors. 

This compares with returns from global ex-US shares5 of 6.6%–8.6% annualised over the same period, given lower volatility (fluctuations in prices), cheaper valuations and higher potential for growth outside the US.


Historically, bonds have served as a stabiliser for portfolios because there’s usually less risk of volatility in bonds than in shares. Over the past decade or so, investors shied away from bonds in favour of cash. But bonds and cash serve separate and distinct purposes. Over the long term (usually five years or more), high-quality bond funds6 have tended to offer better diversification against volatility and potential for returns than cash. While replacing bonds with cash may work in the short term, investors need to consider more than just returns if they want to design a portfolio that can weather all scenarios. 

Current economic conditions have made bonds a more viable asset class that can grow over time and compound your return7 for medium- to long-term savings needs. Global bond markets have repriced significantly over the last two years as interest rates have risen, meaning bond valuations look closer to what they should be. We expect UK bonds8 to return an annualised 3.5%–4.5% over the next decade and for global ex-UK bonds9 (hedged to sterling) to return an annualised 3.6%–4.6% over the next decade. While we expect similar returns for UK and global bonds, it will remain important to diversify because global bonds can offset overall volatility and potentially improve portfolio outcomes. 


Cash should not be considered a substitute for shares or bonds in any market environment, even in the current high interest rate environment, where investors have been able to get a real return10 on cash. Instead, it can be thought of as funds purely for day-to-day needs, for emergency savings or for investors with a very low risk tolerance. 

On the face of it, shifting your portfolio to cash might seem like a good idea in this environment. There is no risk in cash and you’re getting the same return you might from bonds — for now. But cash is limited in its ability to keep up with inflation and investing in cash means forgoing the potential returns you may get by taking out some risk by investing in shares or bonds. 

Investors must also consider the durability of the current returns on cash, which are anchored to interest rates set by central banks. If they cut interest rates, the return on cash also decreases, and you’ll miss out on the income you would have earned if you had maintained your investment in bonds. 

The current economic and market environment is primed to tempt investors to consider forgoing their strategy in order to chase returns. But across and within asset classes, we can’t account for everything, such as how an artificial intelligence-led productivity boom or geopolitical events could affect returns. 

Market leadership is not guaranteed, and chasing returns can leave investors exposed to unnecessary volatility and risk. The chart below shows the performance of various asset classes over the past 10 years. It shows that assets that perform well one year may not necessarily do as well, the following year. For example, as the chart shows, UK government bonds performed well in 2020, but then saw losses in 2021. Additionally, emerging market shares went from high returns in 2016 and 2017 to considerably lower returns in 2023 (with varying returns during the years in between).

Our research shows that a balanced mix of shares and bonds, combined with a disciplined, cost-conscious approach to investing, can help improve investors’ chances of achieving their long-term investment goals, as long as they stay the course.

Key equity and bond index returns over 10 years

A table ranking the annual performance of various asset classes from 2014 to 2023, with little consistency in the performance of each asset class. The asset classes include global shares represented by the FTSE All-World Index, North American shares by the FTSE World North America Index, emerging market shares by the FTSE All-World Emerging Index, developed Asia shares by the FTSE All World Developed Asia Pacific Index, European shares by the FTSE All World Europe ex-UK Index, UK shares by the FTSE All-Share Index, UK government bonds by the Bloomberg Sterling Gilt Index, UK index-linked government bonds by the Bloomberg UK Govt Inflation-Linked UK Index, UK investment-grade bonds by the Bloomberg Sterling Aggregate Non-Gilts – Corporate Index, Global bonds (hedged) by the Bloomberg Global Aggregate Index (hedged in GBP). Currency hedging reduces the increase or decrease in the value of an investment due to changes in the exchange rate. It usually involves a separate transaction that is undertaken in the foreign exchange market before being converted into the investor's local currency.

Past performance is not a reliable indicator of future results.

Source: Vanguard calculations, data from 1 January 2014 to 31 December 2023, using data from Bloomberg, Thomson Reuters Datastream and FactSet. Global equities represented by the FTSE All-World Index, North American equities by the FTSE World North America Index, Emerging market equities by the FTSE All-World Emerging Index, Developed Asia equities by the FTSE All World Developed Asia Pacific Index, European equities by the FTSE All World Europe ex-UK Index, UK equities by the FTSE All-Share Index, UK government bonds by the Bloomberg Sterling Gilt Index, UK index-linked government bonds by the Bloomberg UK Govt Inflation-Linked UK Index, UK investment-grade bonds by the Bloomberg Sterling Aggregate Non-Gilts – Corporate Index, Global bonds (hedged) by the Bloomberg Global Aggregate Index (hedged in GBP). Performance shown is cumulative and denominated in GBP. It includes the reinvestment of all dividends and any capital gains distributions. The performance data does not take account of the commissions and costs incurred in the issue and redemption of shares. Basis of fund performance NAV to NAV.

Bonds are a type of loan issued by governments or companies, which typically pay a fixed amount of interest and return the capital at the end of the term.

Shares can also be described as ‘equities’

Annualised returns show what an investor would earn over a period of time if the annual return was compounded (i.e. the investor earns a return on their return as well as the original capital).

Return expectations for US shares (GBP hedged) based on the MSCI USA Total Return Index (GBP), based on data as at 31 December 2023. Hedged means hedged to the local currency. Source: Vanguard Capital Markets Model (VCMM).

Return expectations for global shares excluding US shares based on the MSCI AC World ex USA Total Return Index, based on data as at 31 December 2023. Source: Vanguard Capital Markets Model (VCMM).

High quality bonds are those that have the best “creditworthiness” and usually include government bonds (backed by the government or one of its agencies) or corporate (company) bonds with high credit quality.

Compounding is when you earn returns on the money you invest as well as on the returns themselves.

Return expectations for UK aggregate bonds based on the Bloomberg Sterling Aggregate Bond Index, based on data as at 31 December 2023. Source: Vanguard Capital Markets Model (VCMM).

Return expectations for global bonds excluding UK bonds (GBP hedged) based on the Bloomberg Global Aggregate ex Sterling Bond Index (GBP Hedged), based on data as at 31 December 2023.

10 A real return is what is earned after accounting for taxes and inflation.

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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 U.S. 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.

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