What Is a 60/40 Portfolio?

Chances are you’re investing in a variety of assets. That can include stocks, bonds, exchange-traded funds (ETFs), mutual funds, and more. Your specific mix of investments is known as your asset allocation. A 60/40 portfolio consists of 60% stocks and 40% bonds. This is considered a moderately conservative allocation. It may work well for some investors, but others may find it incompatible with their long-term financial goals. Here’s how it works so you can determine if it’s right for you.

60% Stocks

When you purchase a stock, you’re buying an ownership stake in the company that issued it. Stocks are vulnerable to market volatility, and ups and downs come with the territory. If prices drop or certain stocks don’t perform as you’d hoped, it could lead to significant losses. But stocks also have the potential for strong returns. Over the past century, the stock market has had average annualized returns of roughly 10%.

40% Bonds

Bonds are seen as safe investments. When you buy a bond, you’re loaning money to the organization that issued it. That can be the federal government, a state or local government, or a corporation. They’re expected to pay you back with interest. Returns typically lag behind stocks. From 1950 to 2022, the average annualized bond return has been 5.5%, according to J.P. Morgan.

Pros and Cons of a 60/40 Portfolio

Pros

• It can help mitigate risk: A 60/40 portfolio can appeal to risk-averse investors. They offer built-in diversification and can help soften the blow of investment losses.
• It has historically delivered steady returns: From 2012 through 2022, the annualized return for a globally diversified 60/40 portfolio was over 6%, according to Vanguard. Future returns are never guaranteed, but 60/40 portfolios are known for providing balance and stability.
• It’s straightforward: Whether you’re working with a brokerage firm or taking a DIY approach to asset allocation, the 60/40 portfolio is fairly simple. Just remember that there may be times when your asset allocation becomes too aggressive or too conservative. This is normal and can happen as asset values fluctuate. Rebalancing your portfolio is when you buy and sell different assets to restore your desired allocation.

Cons

• You might miss out on better returns: Going heavier on stocks, especially when you’re younger, could generate better long-term gains—thanks to compound interest. But doing so will expose you to more risk along the way.
• It isn’t foolproof: Market volatility can impact the equities side of your portfolio. Bond prices also tend to drop in response to rising interest rates. The 60/40 portfolio doesn’t necessarily guarantee a smooth ride.
• It could be less relevant in the future: Over the past few years, financial professionals have been speculating whether the 60/40 portfolio still makes sense. In 2022, returns for this type of portfolio were down roughly 20%, according to Morningstar. Every investor has their own unique goals and risk tolerance. Generalized investment rules don’t always make sense.

Should I Use a 60/40 Portfolio?

Here are some factors that can help you decide if a 60/40 portfolio is right for you:

• Your age: Younger investors are generally advised to go heavier on stocks and lighter on bonds because they have more time to ride out waves of market volatility. The rule of thumb is to gradually adjust your portfolio to be more conservative as you get closer to retirement.
• Your risk tolerance: Investors who have a strong appetite for risk may not mind investing more on the equities side. But if risk makes you uneasy, the stability of a 60/40 portfolio can be appealing—especially if you react emotionally to market dips.
• Your investment goals: If you’re saving for something in the not-so-distant future, a 60/40 portfolio could help offset losses from short-term market declines. You might choose to invest more in growth assets if you’ve got a longer time horizon.

Alternatives to a 60/40 Portfolio

If the 60/40 portfolio doesn’t feel right, you can consider the following age-based benchmarks:

• 20s and 30s: 90% to 100% stocks; 0% to 10% bonds
• 40s: 60% to 70% stocks; 30% to 40% bonds
• 50s and 60s: 50% to 60% stocks; 40% to 50% bonds
• 70s: 30% to 50% stocks; 40% to 60% bonds

The Bottom Line

The right asset allocation for you will depend on a number of things, including your age, risk tolerance, and investment goals. What matters most is staying diversified so that all your eggs aren’t in one basket. That can help spread out risk and protect you from bouts of market volatility.

It’s always wise to prioritize your credit health, no matter what’s going on with your investment portfolio. With free credit monitoring from Experian, you’ll get an alert every time something new pops up on your credit report.

Contact O1ne Mortgage for Your Mortgage Needs

At O1ne Mortgage, we understand that managing your investments and financial health is crucial. If you’re looking for expert mortgage services, don’t hesitate to reach out to us. Call us at 213-732-3074 for personalized assistance and to explore the best mortgage options tailored to your needs. Let us help you achieve your financial goals with confidence.