Why asset allocation matters

We advise investors to select a portfolio allocation that they believe is appropriate for their financial goals, time horizon, and ability and willingness to withstand market fluctuations. Our strategic asset allocations are constructed by using our CMAs, which reflect trends over multiple market cycles.

In addition to our strategic asset allocations based on our long-term CMAs, we offer other sets of allocations based on our shorter-term expectations for deviations from our CMAs. Cyclical allocations (3- to 5-year market outlook) are based on where we believe we are in the market cycle, while tactical allocations (6- to 18-month market outlook) strive to identify near-term variations from our long-term outlook.

We assessed the performance of our CMAs from the onset of 2016 through the subsequent 10-year period that ended December 31, 2025. This decade includes a sizable segment of the 2009 – 2020 bull market, the brief 2020 bear market, the 2020 – 2021 bull market, the 2022 bear market, and the subsequent bull market that commenced in October 2022. The majority of the 10-year time frame was expansionary, coupled with historically low volatility for markets. However, elevated market volatility since 2020 has provided a better balance in returns and risk (as measured by standard deviation). Historically low fixed-income returns in 2022 led to much lower 10-year annualized returns in most fixed-income asset classes compared to our 2016 expectations.

Chart 1: CMA volatility and return assumptions compared to subsequent historical asset-class returnsSources: © Morningstar Direct, All Rights Reserved¹ and Wells Fargo Investment Institute, as of December 31, 2025. FI = Fixed Income. DM = Developed Markets. Inv Grade = Investment Grade. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.

Overall, our analysis found that:

• The 2016 CMA estimates were generally higher than realized returns over the following 10-year period for fixed income, some international assets, and commodities, however, we underestimated the returns for U.S. equities.
• We modestly overestimated expected risk in 2016, as the record-long bull market from 2009 to 2020 led to unexpected, historically low volatility during a large portion of the 10-year time frame. Since 2020, realized volatility has normalized, reverting closer to our risk estimations.
• The rankings for most asset-class returns and risk aligned with realized performance, which contributed to overall allocation performance that was in line with expected returns.

At a more detailed level, the performance highlights we observed for the 10-year period include the following:

Equities: U.S. equities experienced a record-long bull market from March 2009 to February 2020. Because the period contained much of that momentous bull market, returns for U.S. equities, particularly U.S. large caps, exceeded 2016 expectations. Additionally, when we formulated the CMAs, international equities had underperformed U.S. equities for almost a decade. As we expected, international equities continued to underperform U.S. equities, but by more than we anticipated. Going forward, we would expect U.S equities to perform more in line with historical averages.

Commodities: We overestimated commodity returns modestly compared to its realized return over the 10-year period. We believe this resulted in part from a prolonged period of falling prices that persisted for most of the 10-year time frame, lowering actual risk-adjusted returns relative to our expectation in 2016 for returns to more closely resemble the long-term historical average. This decline in prices was driven mainly by China — the world’s largest consumer of most commodities — as it continued to transition from a manufacturing-based economy to a service- and technology-based economy. Prices began to improve after 2020, driven by a shifting supply and demand dynamic that has lifted commodity returns toward our estimates.

Volatility: Financial markets experienced an unprecedented period of low volatility in the years following the financial crisis (March 2009 – February 2020), leading us to modestly overestimate risks for most asset classes. We do not expect markets to experience the same level of low volatility that we saw during the previous bull market. Our current expectations for volatility are more in line with long-term historical averages than with the muted volatility of the 2009 – 2020 bull market.

One final note: Although CMAs are not historical averages but rather forecasts of average annual returns over a long period of time, reviewing past CMAs helps to inform our process of formulating those forward-looking estimates and fine-tuning strategic allocations. For example, our CMAs for 2025 reflect our expectations for asset-class performance based on long-term trends in capital markets, including our expectations for 2.5% long-term inflation, fixed-income yields stabilizing at moderately low rates, continued capital gains in equities, and moderating commodity price gains.

U.S. Municipal FI. Bloomberg Municipal Bond Index is an index of a broad range of investment-grade municipal bonds that measures the performance of the general municipal bond market.

U.S. Inv Grade Taxable FI. Bloomberg U.S. Aggregate Bond Index is composed of the Bloomberg U.S. Government/Credit Index and the Bloomberg U.S. Mortgage-Backed Securities Index and includes Treasury issues, agency issues, corporate bond issues, and mortgage-backed securities.

High Yield Taxable FI. Bloomberg U.S. Corporate High Yield Bond Index covers the U.S.-dollar-denominated, non-investment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB= or below. Included issues must have at least one year until final maturity.

Cash Alternatives. Bloomberg U.S. Treasury Bill (1–3 Month) Index includes all publicly issued zero-coupon U.S. Treasury bills that have a remaining maturity of less than 3 months and more than 1 month, are rated investment grade, and have $250 million or more of outstanding face value. In addition, the securities must be denominated in U.S. dollars and must be fixed rate and non-convertible.

Commodities. Bloomberg Commodity Index is a broadly diversified index of commodity futures on 20 physical commodities, subdivided into energy, U.S. agriculture, livestock, precious metals, and industrial metals sectors. Commodity weights are derived in a manner that attempts to fairly represent the importance of a diversified group of commodities to the world economy.

Preferred Stock. ICE BofA Fixed Rate Preferred Securities Index tracks the performance of fixed rate US dollar denominated preferred securities issued in the U.S. domestic market.

DM ex-U.S. FI. JP Morgan Government Bond Index (GBI) Global Ex U.S. is a total return, market-capitalization-weighted index, rebalanced monthly, consisting of the following countries: Australia, Germany, Spain, Belgium, Italy, Sweden, Canada, Japan, the United Kingdom, Denmark, the Netherlands, and France.

Emerging Market FI. JPM Emerging Markets Bond Index (EMBI) Global is a U.S.-dollar-denominated, investible, market-capitalization-weighted index representing a broad universe of emerging market sovereign and quasi-sovereign debt. While products in the asset class have become more diverse, focusing on both local currency and corporate issuance, there is currently no widely accepted aggregate index reflecting the broader opportunity set available, although the asset class is evolving. By using the same index provider as the one used in the developed market bonds asset class, there is consistent categorization of countries among developed international bonds (ex. U.S.) and emerging market bonds.

DM ex-U.S. Equities. MSCI EAFE Index (Europe, Australasia, Far East) Index is a free-float-adjusted market-capitalization-weighted index designed to measure the equity market performance of developed markets, excluding the U.S. and Canada.

Emerging Market Equities. MSCI Emerging Markets Index is a free-float-adjusted market-capitalization-weighted index designed to measure equity market performance of emerging markets. Note: MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indexes or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.

U.S. Small Cap Equities. Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index.

U.S. Mid Cap Equities. Russell Midcap® Index measures the performance of the 800 smallest companies in the Russell 1000® Index, which represent approximately 25% of the total market capitalization of the Russell 1000 Index.

U.S. Large Cap Equities. S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market-value-weighted index with each stock’s weight in the index proportionate to its market value.

Capital market assumptions (CMAs): It is important to note that indexes have limitations because they have volatility and other material characteristics that may differ from those of an investor's portfolio. They are unmanaged and not available for direct investment. Hedge fund indexes have limitations that are typical of other widely used market indexes, but these indexes are also subject to survivorship bias and limited data. Keep in mind that the securities included in an investment portfolio may differ significantly from the holdings, weightings, and asset allocation of an index, and unlike an index, an investment portfolio is subject to fees, expenses, taxes, transaction costs, and other charges typically associated with an investment account. The performance and volatility of an individual portfolio may be materially different from the performance of an index and should not be relied upon as a measure of the performance a portfolio may achieve. CMA forecasts are not promises of actual returns or performance that may be realized. They are based on estimates and assumptions that may not occur. There is no guarantee any investment will be profitable and not sustain a loss. Investors should consider the limitations of CMA data as it is applied to their own portfolio.

All investing involve risks, including the possible loss of principal. There can be no assurance that any investment strategy will be successful. Investments fluctuate with changes in market and economic conditions and in different environments due to numerous factors, some of which may be unpredictable. Each asset class has its own risk and return characteristics, which should be evaluated carefully before making any investment decision. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. The risks associated with the representative asset classes discussed in this report include:

Commodities: The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or other factors affecting a particular industry or commodity.

Equity securities: Stocks are subject to market risk, which means their value may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. The prices of small/mid-company stocks are generally more volatile than large-company stocks. They often involve higher risks because smaller and midsize companies may lack the management expertise, financial resources, product diversification, and competitive strengths to endure adverse economic conditions.

Fixed income: Investments in fixed-income securities are subject to interest rate, credit/default, liquidity, inflation, and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in a decline in the bond’s price. Credit risk is the risk that an issuer will default on payments of interest and/or principal. This risk is heightened in lower-rated bonds. If sold prior to maturity, fixed-income securities are subject to market risk. All fixed-income investments may be worth less than their original cost upon redemption or maturity. High-yield fixed-income securities are considered speculative, involve greater risk of default, and tend to be more volatile than investment-grade fixed-income securities. Municipal bonds offer interest payments exempt from federal taxes, and potentially state and local income taxes. Municipal bonds are subject to credit risk and potentially the alternative minimum tax (AMT). Quality varies widely depending on the specific issuer. Preferred securities have special risks associated with investing. Preferred securities are subject to interest rate and credit risks. Preferred securities are generally subordinated to bonds or other debt instruments in an issuer's capital structure, subjecting them to a greater risk of non-payment than more senior securities. In addition, the issue may be callable which may negatively impact the return of the security.

Foreign/emerging markets: Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.

Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by Global Investment Strategy (GIS). Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report. Past performance is no guarantee of future results.

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability or best interest analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. The material contained herein has been prepared from sources and data we believe to be reliable but we make no guarantee to its accuracy or completeness.

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