3 Misconceptions About 60/40 Portfolios: Vanguard

2. There’s more than one 60/40 flavor.

The typical 60/40 portfolio used to encompass U.S. stocks and bonds only, but the strategy has evolved to include other asset classes, including non-U.S. securities, Schlanger noted. Advisors and clients also have room to customize.

Alternative investments, including commodities and private equity, can enhance a portfolio’s risk-return profile but they’re not for everyone, “and you have to weigh the potential benefits against the typically higher costs, complexity and illiquidity associated with some of those assets,” Schlanger said.

He cited one approach: investing most retirement money in core asset classes and modestly overweighting certain sectors or actively managed funds that could add value over the long term.

Vanguard Wellington Fund takes this approach, though its actual asset allocation is closer to 65/35, according to the post. The fund tilts toward value stocks and corporate bonds, aiming to add “incremental alpha over time.”

3. Don’t “set it and forget it” with the 60/40 mix.

Using a single fund is the simplest way to hold a 60/40 portfolio because the portfolio manager will handle rebalancing, according to Vanguard. But investors with multiple funds in their portfolio need to make sure the allocation remains appropriate over time, and that may even be the case for those holding only one fund, the firm said.

Investors should periodically revisit their portfolios, Schlanger said, so they can reassess their situation to see whether the asset allocation works now and take on a new allocation if it doesn’t. When appropriate, they also should rebalance the portfolio back to its target allocation, he said.

Without rebalancing, equities may represent larger portfolio share over time, so rebalancing reduces volatility by their allocation constant, Vanguard noted, adding that rebalancing annually is probably adequate for most investors.

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