Investing in a diverse mix of stocks and bonds can help you grow your portfolio while reducing unnecessary risk. You can use many different portfolio management strategies to do this, but the right one for you depends on your needs and preferences.
Having a 60/40 portfolio is a strategy that provides broad diversification that can put you at a moderate risk level while still taking advantage of the potential returns of the stock market. It offers a way to balance income stability with the potential for long-term growth to carry you through retirement.
What is a 60/40 portfolio?
A 60/40 portfolio is a collection of investments split between 60% stocks and 40% bonds. This ratio is a conventional strategy designed to meet both your short- and long-term goals by mixing asset types in a balanced way.
The mix of asset classes within a portfolio is called
Benefits & drawbacks of a 60/40 portfolio
As with any investment decision you make, a 60/40 portfolio has advantages and disadvantages.
The slightly heavier stock allocation means your portfolio still fluctuates with market volatility, creating some risk. But the main benefit of the allocation split is that your bond investments aim to offset the risk with the potential for moderate long-term returns.
However, holding a significant number of bonds also means interest rates influence your portfolio's return and the amount of interest income it provides. When interest rates are high, the mix can help counter any market volatility. But when they're low and the market is down, this particular mix may suffer.
Who should have a 60/40 portfolio?
Your personal situation and financial goals should drive your portfolio choice, but a 60/40 portfolio is suitable if you have a moderate
If you're a long-term investor or have a higher risk tolerance, you might be better off with more aggressive portfolios that hold more stocks since these are likely to grow more quickly. If you're a conservative investor or have a short time horizon, you may be better off holding more conservative allocations.
Alternative ways to build a 60/40 portfolio
You can build this portfolio mix with individual stocks and bonds. You also can swap out one of the portions for other moderate-risk investment vehicles, such as mutual funds, exchange-traded funds (ETFs) and target-date funds. Many financial advisors are equipped to help you construct a portfolio that reflects your risk profile and investment time horizon.
Mutual funds and ETFs can simplify your investment selection decision. They involve picking expert-managed collections of stocks, bonds and securities rather than you doing the legwork. Target-date funds do the same, but they're managed with your expected retirement year in mind.
Mutual funds & ETFs
Building this kind of portfolio can be as simple as putting 60% in a total stock market fund and 40% in a total bond market fund. Some
Some mutual funds and ETFs also already have a 60/40 asset allocation. You can buy one fund and instantly own the portfolio. The main downside is you won't be able to tailor the portfolio to your specific needs. But it can offer simplicity.
Is a 60/40 portfolio right for you?
A 60/40 portfolio is a solid investment strategy for moderate-risk investors who seek both current income and long-term growth. However, there's no one-size-fits-all strategy in investing. You should choose a portfolio that aligns with your goals, time horizon and risk tolerance.
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