The Rest Of Your Fidelity 40: Where Does It Go?

The 60/40 portfolio is a classic investment strategy that involves allocating 60% of an investor's funds to stocks and 40% to bonds. This diversification between growth and income assets aims to provide a safe and stable way to grow investments without taking on excessive risk. While stocks offer higher growth potential, bonds help to mitigate volatility. This model has been a cornerstone of investment strategies for decades, but it has faced increasing scrutiny in recent years. Despite this, the 60/40 portfolio still has its proponents, who argue that it can help investors meet their financial goals.

Stocks and bonds are a classic 60/40 portfolio

However, the investment landscape has evolved, and today, alternative investment strategies are available to the masses. As a result, the traditional 60/40 portfolio has faced scrutiny and is no longer considered adequate by some experts. The main criticism is that a well-diversified portfolio should include more asset classes than just stocks and bonds.

Some professionals now advocate for different weightings and a broader range of asset classes, such as alternative investments like hedge funds, commodities, private equity, and inflation-protected assets. These additions to a portfolio can help investors achieve sustainable long-term growth and better manage risk.

The 60/40 portfolio has been a cornerstone of investment strategy for decades, providing a balanced approach to investing. However, as the investment landscape continues to evolve, investors and advisors may need to consider alternative strategies to enhance portfolio performance and better meet their financial goals.

The 60/40 model smooths out the ride

The 60/40 portfolio model is a standard investing benchmark that helps investors diversify. It involves allocating 60% of an investor's money to stocks and 40% to bonds. This diversification of growth and income has generally been a safe, simple way for investors to grow their money without taking on too much risk. Stocks offer greater growth, while bonds help to reduce volatility.

Historically, stocks and bonds have had a relatively low correlation. This means that when one is doing well, the other is likely to be performing poorly, and vice versa. By putting them together in a 60/40 portfolio, you can smooth out the ride and help investors stay invested, which is the key to achieving their wealth goals.

For example, in 2022, stock and bond returns were both negative, a rare pattern. However, over time, a well-diversified portfolio can still provide returns that help investors meet their financial goals. Since 1926, well-diversified portfolios that have included a mix of stocks, bonds, and short-term investments have posted positive returns in the 3, 5, and 10 years after a period of high inflation.

The 60/40 model is a good starting point for beginners, but it's important to consider your individual risk tolerance and capacity. There are a few simple ways to start putting money into a 60/40 portfolio:

• Buy into a fund that already utilizes the 60/40 strategy, such as the Vanguard STAR® Fund (VGSTX).
• Use exchange-traded funds (ETFs), which are a straightforward and low-cost way to implement the strategy.
• Purchase a target-date fund that allocates 60/40. As you approach your target retirement date, the fund will shift its investments to be more conservative.
• Sign up with a robo-advisor, which can help you reach a 60/40 portfolio allocation based on your goals and time horizon.

Alternatives to 60/40 include commodities, private equity and private credit

The traditional 60/40 portfolio, where 60% is invested in stocks and 40% in bonds, is no longer considered a robust investment strategy. The diversification benefits of stocks and bonds are now being questioned, with investors seeking alternative investments to improve portfolio resilience.

One alternative investment strategy is to allocate a portion of the portfolio to commodities. Commodities such as precious metals, timber, and collectibles can provide a hedge against inflation and offer stable returns during economic downturns.

Private equity is another alternative investment option. Private equity funds invest in private companies, which can provide higher returns than stocks. Private equity funds are typically less liquid than stocks, but they can provide access to a wider range of investment opportunities.

Private credit is a third alternative investment option. Private credit funds lend money to private companies and can offer higher income streams than bonds. Private credit funds can provide diversification benefits and higher returns, but they also carry higher risks.

When considering alternative investments, it is essential to evaluate their diversification benefits, durability as a source of returns, and defensive qualities during market downturns.

The 60/40 portfolio is a safe, mundane way to grow money

The 60/40 portfolio is a classic investing strategy that has been a standard investing benchmark for many years. It involves allocating 60% of an investor's portfolio to stocks and 40% to bonds. This diversification between growth assets (stocks) and income-generating assets (bonds) has generally been considered a safe, mundane way to grow money without taking on excessive risk.

The rationale behind the 60/40 portfolio is that stocks and bonds often exhibit low correlation, meaning that when stocks are performing well, bonds may be underperforming, and vice versa. By combining these two asset classes in a portfolio, investors can smooth out the volatility inherent in the stock market and potentially achieve their long-term financial goals. This strategy can help investors stay invested during market downturns, which is crucial for wealth accumulation.

However, the effectiveness of the 60/40 portfolio has come under scrutiny recently, particularly after its dismal performance in 2022, when both stock and bond returns were negative, an unusual occurrence. This has led some experts to suggest that the 60/40 model may no longer be sufficient and that alternative investments should be considered to improve portfolio performance and achieve specific investor goals.

Despite this recent underperformance, the 60/40 portfolio still has its merits and can be a good starting point for beginner investors. It is important for new investors to understand their risk tolerance and risk capacity before adopting any investment strategy, including the 60/40 portfolio.

• Invest in a fund that utilizes the 60/40 strategy: Funds like the Vanguard STAR® Fund (VGSTX) offer a simple way to gain exposure to the 60/40 allocation by investing in a selection of Vanguard funds, including domestic and international stock funds and U.S. bond funds. This particular fund has a low minimum investment requirement, making it accessible to younger investors.
• Use Exchange-Traded Funds (ETFs): ETFs are a straightforward and low-cost way to implement the 60/40 strategy. For example, you can allocate 60% of your portfolio to an S&P 500 ETF like SPDR® S&P 500® ETF Trust (SPY:NYSE Arca) and 40% to a bond ETF like iShares Core U.S. Aggregate Bond ETF (AGG:NYSE Arca), which tracks the Barclays U.S. Aggregate Bond Index.
• Purchase a target-date fund with a 60/40 allocation: Target-date funds automatically adjust their asset allocation based on the investor's risk tolerance and time horizon. As the investor approaches retirement, these funds gradually increase their bond allocation, providing a more conservative portfolio mix.
• Sign up with a robo-advisor: Robo-advisors use computer algorithms to build and manage portfolios based on an investor's goals, risk tolerance, and market conditions. They can be a good option for those who prefer a hands-off investing approach and want a personalized portfolio recommendation.

The 60/40 model is a good starting point for beginners

The 60/40 portfolio model is a classic investing strategy that has been a standard investing benchmark for many years. It involves allocating 60% of an investor's portfolio to stocks and 40% to bonds, providing a balance of growth and income. This diversification helps to reduce risk and smooth out market volatility, making it a good starting point for beginner investors.

Moderate Risk

The 60/40 portfolio has long been considered a moderate-risk investment strategy. Stocks offer higher growth potential but come with higher risk, while bonds provide a more stable and consistent return with lower risk. By combining these two asset classes, beginners can benefit from a balanced approach that aims to capture growth while managing risk.

Historical Performance

Historically, stocks and bonds have had a relatively low correlation. This means that when stocks go up, bonds often go down, and vice versa. By allocating 60% to stocks and 40% to bonds, investors can benefit from having some assets growing while others are declining, dampening the impact of market volatility. This strategy has proven effective over time, helping investors stay invested and achieve their financial goals.

Simplicity and Accessibility

The 60/40 model is straightforward and easy to understand, even for those new to investing. Beginners don't need to spend excessive time researching and selecting individual stocks or bonds. Instead, they can allocate their investments according to the 60/40 ratio, utilising funds, exchange-traded funds (ETFs), or target-date funds that already employ this strategy. This simplicity makes it accessible and less daunting for those just starting their investment journey.

Flexibility

The 60/40 model provides a good foundation, but it can also be tailored to an individual's specific needs and goals. Before investing, beginners should assess their risk tolerance and ensure the strategy aligns with their risk capacity. As they gain more experience and knowledge, they can adjust the allocation or explore other investment options, such as alternatives, commodities, or other asset classes, to further diversify their portfolio.

Peace of Mind

The 60/40 model can provide peace of mind for beginners who may be nervous about investing. Knowing that their portfolio is diversified across two major asset classes can help ease concerns about market volatility. Additionally, the moderate-risk nature of the strategy can give beginners confidence that they are taking a sensible approach to growing their wealth without taking on excessive risk.

In conclusion, the 60/40 model is a good starting point for beginners as it offers a balanced approach to investing, historical evidence of effectiveness, simplicity, flexibility, and peace of mind. While it may not be suitable for everyone, it can serve as a solid foundation for those taking their first steps into the world of investing.

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