The numbers in a "60/40 portfolio" represent the allocation of your investment assets between stocks and bonds.
In this context, a 60/40 portfolio is comprised of:
- 60%: Stocks
- 40%: Bonds
This means that 60% of the portfolio's value is invested in stocks (equities), while the remaining 40% is invested in bonds (fixed income).
Understanding the Asset Allocation
According to reference material, a 60/40 portfolio is considered a "moderately conservative asset allocation that can help mitigate risk and provide stable returns." This particular mix aims to balance growth (from stocks) with stability and reduced risk (from bonds). While potentially suitable for some investors, reference material indicates that "others may find it incompatible with their long-term financial goals."
Example
For example, if you have $10,000 to invest in a 60/40 portfolio, you would allocate:
- $6,000 to stocks (60% of $10,000)
- $4,000 to bonds (40% of $10,000)
Key Considerations
- Risk Tolerance: A 60/40 portfolio suits investors with a moderate risk tolerance.
- Financial Goals: Whether it's right for you depends on your investment timeline and objectives.
- Rebalancing: Periodically rebalancing the portfolio is crucial to maintain the desired asset allocation. If stocks perform well and the portfolio drifts to 70% stocks and 30% bonds, selling some stock and buying more bonds will restore the 60/40 balance.
