One of the most common investment strategies is the 60/40 portfolio, which involves building a portfolio which contains 60% equities and 40% bonds. Going this route can make portfolio-building simple, but it’s not right for everyone.
What is the 60/40 Portfolio?
In theory, a 60/40 mix is designed to minimize risk while generating a consistent rate of return over time, even during periods of volatility. This is generally taken to mean that you allocate your invested assets 60% to equities for their attractive record of long-term growth of capital, and 40% to bonds for their income, and especially for protection against the volatility of equities.
One of the biggest disadvantages of a 60/40 portfolio is its underperformance compared to an all-equity portfolio over the long term. Although bonds can provide stability and mitigate downside risk, they typically yield lower returns than equities. This means that in bull markets, the 60/40 portfolio may not capture the full upside potential of the equity market, leading to lower returns than an all-equity portfolio.
Furthermore, over very long periods of time, the underperformance of a 60/40 portfolio can be significant due to the effects of compounding interest. Over decades, even small differences in returns can compound to create a large gap between the two portfolios. This means that investors who are investing for the long term, such as those saving for retirement, may need to carefully consider the impact of a 60/40 portfolio on their overall returns.
It’s important to note that there is no one-size-fits-all investment strategy, and different approaches may be better suited for different investors depending on their goals, risk tolerance, and other factors. However, investors who choose a 60/40 portfolio should be aware of its potential limitations and consider whether it aligns with their long-term investment objectives.
If there is one thing to take away, it should be the reminder to never stop the compounding. when prices go down, that’s your cue to buy more! We suggest holding established stocks that pay dividends rather than bonds, to get a balance of growth and stability. Always remember to stay disciplined and stick with your long-term plan.
We hope you enjoyed this month’s Client’s Corner. Please do not hesitate to reach out if you have any questions or feedback.
Thinking about hiring a professional to help you implement a long-term financial strategy? We would be more than happy to set up a 30-minute discovery call to get a better understanding of your unique situation.
