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.
| ETF: VOO S&P 500 | 60% |
| ETF: BND Mid Term Bond | 40% |
What is the Bogleheads 60/40 Portfolio?
The 60/40 Portfolio has served as a cornerstone asset allocation of long-term investing for decades, originally borne of the simple desire for one’s investments to survive downtowns, something that a 100% stocks portfolio may not always do without a sufficiently long investing horizon. Peter Bernstein considered the 60/40 portfolio to be the “center of gravity” between risk and return.
As the name implies, the 60/40 Portfolio is simply a portfolio comprised of 60% stocks and 40% bonds. The premise is that the uncorrelation of bonds to stocks increases diversification, reduces volatility, and helps protect against drawdowns and black swan events.
The specific allocation has historically been a moderate balance of stock-driven returns and bond-driven risk reduction. Interestingly, the rationale behind the specific 60/40 allocation was originally largely based simply on tradition and intuition, which was later affirmed by modern portfolio theory.
Learn more about portfolio asset allocation here
Stocks
For the 60% stocks position, we have several choices. You could choose to use the S&P Index, the total U.S. stock market, the total world stock market, the Russell 1000 index, etc. To broadly diversify across U.S. stocks, I’m suggesting the use of a total U.S. stock market fund, to get some exposure to small- and mid-cap stocks, which have outperformed large-cap stocks historically due to the size factor premium.
Bonds
For bonds, the obvious and popular choice is a total bond market fund, but since we know treasury bonds are superior to corporate bonds, I’m suggesting intermediate treasury bonds, which should roughly match the average duration of the total U.S. treasury bond market.
Long-term bonds are likely too volatile – and too susceptible to interest rate risk – for older investors, and short-term bonds are too conservative for young investors at a 40% allocation, so intermediate-term bonds offer a happy medium that is suitable for most investors.