The “60/40 portfolio” describes the composition of what most in the investment industry deem to be a balanced portfolio.
The target allocation is 60% stocks and 40% bonds, explains Jonathan Lee, senior portfolio manager at U.S. Bank private wealth management.
“Stocks allow for growth while bonds provide price stability and income generation,” he says.
According to Lee, the 60/40 portfolio allocation is making a comeback.
“Absolutely, diversification resulting from holding both stocks and bonds has proven beneficial to investors over long periods of time,” Lee tells FOX Business. “Typically, when stock returns are down, bond returns are up, and vice versa. There are many years where both stocks and bonds post positive returns.”
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He does note that 2022, however, was the first year since 1969 that both stocks and bonds posted negative returns.
“Context is important. Inflation was higher than we had seen in decades, and aggressive action from monetary policymakers resulted in rapidly rising interest rates. An atypical environment resulted in atypical results,” he adds.
According to Lee, in 2023, the rate of inflation continues to improve, and monetary policymakers are, consequently, less aggressive in their approach.
“In response, stocks have risen, and bonds are less susceptible to significant price declines due to rising rates,” Lee says. “In fact, bond investors are enjoying the increased income offered in this higher interest-rate environment.”
Generally, investors with greater wealth have the ability to assume more risk, but it is truly dependent on their lifestyle and goals, says Lee.
“For example, a wealthy couple who is confident that their financial needs are met through other sources may invest a portion of their assets with their children top-of-mind as beneficiaries,” he adds. “Their children have a longer time horizon; therefore the couple may determine an 80% stocks/20% bonds mix is appropriate.”
When the market does well, investors tend to shift their allocations to equities, explains Roxanna Islam, associate director of research at VettaFi.
“While a mixed 60/40 portfolio is safer during market downturns, a big disadvantage is that it could miss out on returns when the market does well,” she says.
A 60/40 allocation isn’t set in stone and is usually adjusted based on an investor’s time horizon, age, risk tolerance, and financial goals, notes Islam.
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“For example, an older investor with less time to retirement may be less able to take a risk and may have a higher proportion of fixed income to equity ratio in order to maintain a diversified portfolio,” Islam tells FOX Business. “Similarly, a younger investor may be more able and willing to take a risk and can have a higher proportion of equity while still remaining diversified.”