Stocks/Bonds 60/40 Portfolio description

Mar 19, 2025 | 401Ks

Stocks/Bonds 60/40 Portfolio Overview

Background and Philosophy

The 60/40 Portfolio is a classic balanced investment strategy that has been widely used by investors for decades. While there is no single “author” of this approach, it has been popularized by financial advisors, institutional investors, and passive investing advocates as a simple yet effective way to balance growth and stability. The philosophy behind this portfolio is rooted in Modern Portfolio Theory, which emphasizes diversification across asset classes to optimize risk-adjusted returns. By allocating 60% to equities (for growth) and 40% to bonds (for stability), this portfolio aims to provide moderate growth while mitigating downside risk during market downturns.

Asset Allocation, Diversification, and Risk

The portfolio consists of two core holdings:

  • VTI (60%): Vanguard Total Stock Market ETF, providing exposure to the entire U.S. equity market (large, mid, and small-cap stocks). This offers broad diversification across sectors and market capitalizations.
  • BND (40%): Vanguard Total Bond Market ETF, covering the U.S. investment-grade bond market (government, corporate, and mortgage-backed securities). This provides income and reduces overall portfolio volatility.

Risk Level: Moderate. The 60/40 split balances growth potential with risk management, making it suitable for investors with a medium risk tolerance.

Pros:

  • Simple and easy to maintain (true to the “lazy portfolio” philosophy).
  • Historically provides solid returns with lower volatility than all-equity portfolios.
  • Rebalancing between stocks and bonds can help “buy low and sell high” over time.

Cons:

  • Lower growth potential than all-equity portfolios during strong bull markets.
  • Bond returns may suffer in rising interest rate environments.
  • Lacks direct exposure to international stocks and alternative assets (though VTI includes some multinational companies).

Application for Retirement Accounts (401(k) and IRA)

The 60/40 Portfolio is well-suited for retirement investors seeking a hands-off approach with balanced growth and income. Here’s how to implement it in a 401(k) or IRA:

For 401(k) Accounts:

  1. Identify comparable funds in your plan’s investment options:
    • VTI Alternative: Look for a “Total U.S. Stock Market Index Fund” or an S&P 500 index fund if no total market option exists.
    • BND Alternative: Seek a “Total Bond Market Index Fund” or an intermediate-term bond fund.
  2. If exact matches aren’t available, approximate the allocation using broader categories:
    • For missing stock exposure: Allocate to U.S. large-cap, mid-cap, or small-cap funds.
    • For missing bond exposure: Use a stable value fund or other fixed-income options.
  3. Rebalance annually or when allocations deviate significantly from the 60/40 target.

For IRA Accounts:

Investors can directly purchase VTI and BND (or their mutual fund equivalents) in an IRA, making implementation straightforward. IRAs offer more flexibility if additional diversification (e.g., international stocks) is desired.

Note: Many 401(k) plans lack specialized funds like commodities or REITs. In such cases, investors should allocate those portions to the nearest applicable asset class (e.g., stocks for commodities) rather than leaving them uninvested.