| The 60/40 investing rule is one of those long-held canons of personal finance.
The rule says you should have 60% of your portfolio in stocks and 40% in bonds.
It is typically referred to as a “balanced” allocation and is designed to offer you protection in times of market volatility. You’re essentially using your stake in bonds as a hedge against the ups and downs of the stock market.
That’s because bonds have been historically lower-yielding but less prone to wild swings. They are considered a steady, “safer” investment.
Balance is important here, because if you have too much exposure to stocks, you risk a huge loss during a market crash; too much in bonds, and you risk not having enough to retire.
Here’s an example of how the rule is supposed to work: Say your stock holdings took an 8% hit. If you had all of your investments tied up in stocks, you’d lose 8%.
Because you invest in bonds — and your holdings increased 1.5% — that means your entire portfolio would be down by only 4.2%, cushioned by the bond earnings.
But while 60/40 has served investors well, some experts say it’s in need of an update. What you’re likely to hear from your financial adviser is a call for a more complicated, more sophisticated mix of investments that still keeps to the fundamental principle of long-term growth.