How to decide if a 60/40 portfolio is right for you

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.

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 asset allocation. Your asset allocation largely determines how your portfolio behaves. As the stock portion of your portfolio increases, so do your risks and potential returns. Adding more bonds decreases your risk but also lowers your expected returns.

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.

Your personal situation and financial goals should drive your portfolio choice, but a 60/40 portfolio is suitable if you have a moderate risk tolerance. It's considered the classic retiree portfolio because it can be expected to produce adequate income to cover your immediate needs while also providing enough returns for the portfolio to last.

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.

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.

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 mutual funds and ETFs also represent segments of the market. You can customize your portfolio to address your unique needs by investing in specific types of stock and bond funds. For example, municipal bond funds provide tax-advantaged income, and emerging market funds may increase diversification and returns.

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.

Target-date funds offer a way to buy a total portfolio with a diversified mix with one investment. But unlike a true 60/40 portfolio, they don't hold the same allocation continuously. Because they're focused on maintaining a mix with your retirement in mind, they gradually become more conservative with investments over time. As with preset 60/40 mutual funds and ETFs, this can present an easy option, but you lose some flexibility.

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.

Reach out to a financial advisor with the expertise to help you determine a strategy that works best for you.