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The stock market is a great way to generate wealth, but it can sometimes be quite volatile. Investors who either lack the time or the risk tolerance to endure such volatility tend to look for safer strategies. This is what gives rise to strategies like the 60/40 portfolio.
Instead of investing the vast majority of your portfolio in stocks, you add a substantial bond allocation. In doing so, you add stability while still allowing your portfolio to grow over time. While this approach has its pros and cons, it can work well for the right investor.
What is a 60/40 portfolio
A 60/40 portfolio is generally one that has a 60% allocation to stocks and a 40% allocation to bonds. This gives you the growth potential of stocks combined with the stability of bonds, which tend to be less volatile.
In other words, adding a larger bond allocation can reduce some of the downside risk of an all-equity portfolio. This means that a 60/40 portfolio can be more resilient when the stock market drops.
The bond allocation of the 60/40 portfolio also provides investors with fixed income. Bonds are a form of debt, and investors receive regular interest payments. Stocks can pay interest as well in the form of dividends, but that isn’t always the case.
Pros and cons
As with all investment strategies, the 60/40 portfolio has its share of pros and cons:
Pros
- Diversification: This portfolio gives investors an easy way to diversify their portfolios across stocks and bonds. This can help mitigate risk, as the two types of investments can perform differently.
- Balanced returns: Stocks have high growth potential, while bonds provide stability and income. Combining the two can provide reasonable returns while reducing volatility.
- Simplicity: The 60/40 portfolio is a simple strategy that is easy for most investors to implement.
- Historical performance: The 60/40 portfolio has historically had solid returns and helped limit risk.
Cons
- May sacrifice returns: A 60/40 portfolio will typically outperform an all-equity portfolio while the stock market is down. However, equities tend to have better long-term returns than bonds. This means the 60/40 portfolio may sacrifice some returns for the sake of stability.
- Interest rate risk: Bond prices drop when interest rates rise, and these conditions can impact the value of the bond portion of the 60/40 portfolio, as it did in 2022.
- Changing market dynamics: Some experts believe that the traditional 60/40 portfolio may not perform as well in the future. This is due to low interest rates and the potential for lower returns from both stocks and bonds.
Who should use it?
Generally, this portfolio is the best match for those with relatively low risk tolerance and investors later in their careers. For example, middle-aged investors who don’t have decades to recover from a down market may benefit from the 60/40 portfolio.
In addition, those who have a moderate risk tolerance may prefer this portfolio. This is because the balance between stocks and bonds can provide reasonable returns while providing some protection from the volatility of the stock market.
Lastly, investors who want simplicity may prefer the 60/40 portfolio. This portfolio is simple to implement and manage. This makes it easy for the average investor to get started with a hands-off approach.
Bottom line
The 60/40 portfolio invests 60% in stocks and 40% in bonds. This approach provides investors with the growth potential of stocks with the added stability and income of bonds. Therefore, investors can achieve reasonable returns while keeping risk under control. This makes it ideal for investors in the middle of their careers and those with moderate risk tolerance.
However, investors should understand that they may sacrifice some returns, as stocks have historically outperformed bonds. Still, the 60/40 portfolio is a strong strategy overall. For the right investor, it can provide the desired results while taking a hands-off approach to investing.
FAQs
A 60/40 investment strategy allocates 60 percent of holdings to stocks — a high-risk, high-reward asset — and 40 percent to bonds — long considered boring but dependable. The idea is that one helps balance the other, offering more stability than a stock-heavy portfolio and better returns than a bond-heavy portfolio.
Who should have a 60 40 portfolio? ›
Key Takeaways. The 60/40 portfolio is the standard-bearer for investors with a moderate risk tolerance. It gives you about half the volatility of the stock market but tends to provide good returns over the long term. For the past 20 years, it's been a great portfolio for investors to stick with.
Why is the 40 60 balanced portfolio being challenged? ›
This diversification dynamic has been challenged by present market conditions. Stocks and bonds tend to bear a low or negative correlation during low inflation periods. In 2022, inflation and rising interest rates turned this relationship on its head and the 60/40 portfolio had its worst year since at least 1937.
Why the 60 40 portfolio is making a comeback? ›
The classic investment portfolio of 60% stocks and 40% bonds is doing very well at the moment — it's risen 17% in the past year. Why it matters: After more than a decade when interest rates were at or near zero, bonds provide real income again — without the volatility inherent to stocks.
What is the best benchmark for a 60/40 portfolio? ›
The usual 'go to' benchmark is a geographic market cap weighted index, such as the S&P500 for the US or the FTSE100 for the UK. However, an argument can be made that the benchmark could also be an index aggregating the performance of other institutional long-only equities funds.
At what age should you have a 60 40 portfolio? ›
As you reach your 50s, consider allocating 60% of your portfolio to stocks and 40% to bonds. Adjust those numbers according to your risk tolerance. If risk makes you nervous, decrease the stock percentage and increase the bond percentage.
What is the 60 40 rule? ›
What is the 60/40 rule? The 60/40 portfolio is a simple investment strategy that allocates 60 percent of your holdings to stocks and 40 percent to bonds. It's sometimes referred to as a “balanced portfolio.” The 60/40 rule has been widely recognized and recommended by financial advisors and experts for decades.
What is the downside of a 60/40 portfolio? ›
Inflation is the biggest risk to a 60/40 portfolio because it can trigger central bank tightening which pushes up real rates, which weighs both on equities and bonds. That risk is now going the other way, where rates can come down and equities can be buffered by bonds.
What is a 60 40 balanced portfolio? ›
Past performance does not predict future returns.
The term '60/40' is generally used to describe a 'balanced' portfolio with a 60% allocation to stocks and a 40% allocation to bonds. Depending on clients' individual investment objectives and goals, however, balanced portfolios typically range between 40%–60% equities.
Is a 60 40 portfolio safe? ›
According to some money managers, it depends. “A 60/40 allocation is appropriate for many investors at some point in their lives,” Goland said. “An alternative is to adopt a more flexible strategy where your allocation weightings change over time depending on your time horizon, cash flow needs and risk tolerance.”
Vanguard's research paper on this subject suggests that, for most investors, rebalancing on an annual basis is adequate. “Whether it's 60/40 or another asset allocation, rebalancing will help make sure your portfolio is consistent with your risk tolerance,” Schlanger said.
Are 60 40 portfolios facing worst returns in 100 years? ›
LONDON, Oct 14 (Reuters) - Investors with classic "60/40" portfolios are facing the worst returns this year for a century, BofA Global Research said in a note on Friday, noting that bond markets continue to see huge outflows.
What is the outlook for a 60/40 portfolio? ›
The outlook for 60:40 returns is challenging
The US-centric portfolio is expected to deliver an annualised total return of around 6.5% over the next 10 years, with the global portfolio slightly better at 6.8%.
Is 60/40 dead? ›
Here's Why. After a disastrous 2022, it turned out not to be dead after all. The dual bear market for both stocks and bonds in 2022 created the perfect storm for the 60/40 portfolio, which had been a popular asset-allocation strategy for the past couple of decades.
What are the returns of a US 60 40 portfolio? ›
Indeed in 2023, stocks surged with the S&P gaining 26.3% and U.S. 10-year treasuries up 3.6%. As a result, 60/40 returned 17.2%, far above its historical annual median return of +7.8%. In 2022, central banks raised interest rates to tame the highest inflation rate in 40 years amid the tightest labor market in 50 years.
What is the Sharpe ratio of a 60/40 portfolio? ›
The current Stocks/Bonds 60/40 Portfolio Sharpe ratio is 1.89. This value is calculated based on the past 12 months of trading data and takes into account price changes and dividends.
Should I invest in a 60/40 portfolio? ›
Key Takeaways. Once a mainstay of savvy investors, the 60/40 balanced portfolio no longer appears to be keeping up with today's market environment. Instead of allocating 60% broadly to stocks and 40% to bonds, many professionals now advocate for different weights and diversifying into even greater asset classes.
What is the ideal portfolio mix by age? ›
Investors in their 20s, 30s and 40s all maintain about a 41% allocation of U.S. stocks and 9% allocation of international stocks in their financial portfolios. Investors in their 50s and 60s keep between 35% and 39% of their portfolio assets in U.S. stocks and about 8% in international stocks.
Is 80/20 better than 60/40? ›
Which Mix Is Right for You? If you're a younger investor with a long time horizon and are comfortable taking on more risk, the 80/20 portfolio may be a good fit. However, if you're closer to retirement or prefer a more conservative approach, the 60/40 portfolio may be a better option.
