The classic 60/40 investment strategy involves allocating 60% of your capital towards stocks and 40% in bonds. This traditional portfolio mix carries a moderate level of risk. It allows investors to benefit from the stock market’s long-term capital appreciation, while smoothing out some of the volatile market fluctuations and with low-risk government bonds. The idea is that equities and fixed income usually don’t move in tandem, therefore when stocks perform poorly, bonds may offset some of the losses and provide income.
Why is the 60/40 portfolio a classic allocation?
To understand why the balanced 60/40 mix has been an investment mainstay for decades, let’s compare its returns with two extremes — a 100% stocks portfolio and a 100% bonds portfolio — from 1926 to 2021. The historical average annual return for the all-stocks portfolio during that period was 12.3%, with its worst year (1931) returning -43%, based on calculations...