The 60/40 Investment Rule Explained

If you are interested in investing, you have probably already seen the 60/40 rule mentioned many times. This moneyland.ch guide gives you the most important information about this topic.

What is the 60/40 rule?

The 60/40 strategy owes its name to the makeup of the investment portfolio it represents. In a 60/40 portfolio, 60 percent of the portfolio is made up of stocks, while the remaining 40 percent is made up of bonds. These ratios have long been considered the definitive rule for creating a diversified investment portfolio that balances high returns with comparatively low risk. However, the 60/40 rule has lost in significance in recent years.

The concept behind the 60/40 rule is based on research carried out in the 1950s by a team headed by economist Henry Markowitz. The logic behind the concept is that the value of bonds goes up when the prices of stocks fall. So the makeup of a 60/40 portfolio provides hedging against losses while still allowing for relatively high returns.

The 60/40 rule is generally considered to be a defensive strategy. It targets investors who consider investing only in stocks to be too risky.

Can I invest in a 60/40 portfolio using an ETF?

Using an exchange-traded fund (ETF) that follows a 60/40 strategy offers an alternative if you prefer not to manage your own 60/40 portfolio. The main advantage of using an ETF is that you do not need to handle the necessary, ongoing rebalancing yourself.

The Vanguard LifeStrategy 60% Equity UCITS ETF is one example of an ETF that holds stocks and bonds with a 60 percent to 40 percent ratio. This ETF uses an actively-managed investment strategy, investing in many other ETFs instead of buying stocks and bonds directly. The fund's managers decide how much of the fund's capital is allocated to each of the ETFs in its portfolio. The fund is available in both accumulating and distributing versions.

Table 1: Overview of 60/40 ETFs

Sources: Fund managers and Justetf.com. Date: February 4, 2025.

It is important to note that the ETFs shown in Table 1 are both fund of funds ETFs. At first glance, the total expense ratio (TER) of 0.25 percent appears to be relatively low, especially for an actively-managed fund. But in fact the costs can be higher because the ETF invests in many other ETFs (see Table 2), each of which have their own fees. These costs detract from performance.

Table 2: ETFs used by the Vanguard LifeStrategy 60% Equity UCITS ETF

Source: Fund manager. Date: February 4, 2025.

Alternatively, there are many actively-managed mutual funds – including strategy funds and funds of funds – which can be used to invest in a portfolio with a 60-percent stock component and a 40-percent bond component. But you should be aware that mutual funds generally have higher fees than ETFs.

Another option is to use an online asset management service, also known as a robo advisor. These service providers invest your money in your preferred investment portfolio in an automated way. Most robo advisors primarily use ETFs for portfolios.

What should I pay attention to when buying stocks for my 60/40 portfolio?

The original 60/40 concept was conceived on the basis of US securities, but in principle you can apply it to various countries and regions. It is generally beneficial to diversify as much as possible by spreading your investment capital out over many different stocks. You should also keep your investment costs as low as possible.

If you put together a 60/40 portfolio yourself, using a passively-managed ETF that replicates a global stock index is a simple way to add a globally-diversified stock component. But you should be aware that most global stock indexes have disproportionately large US components. You can find more information in the moneyland.ch guide to investing in global stock indexes.

What should I pay attention to when buying bonds for my 60/40 portfolio?

As with stocks, having a diversified bond component is advisable. Spreading the capital allocated to bonds across a global portfolio of bonds helps minimize risks, such as the risk of a bond issuer defaulting on their loan. You should also look at the issuers’ creditworthiness.

Using a bond ETF that tracks an international bond index is a simple way to create a diversified bond component for your 60/40 portfolio. You can find detailed information in the moneyland.ch guide to bond ETFs.

What are the disadvantages of a 60/40 strategy?

Investing in securities like stocks and bonds always comes with a risk of loss. That is true even if you use a conservative strategy like the 60/40 rule. Your investment can lose value at any time, and there is never a guarantee that you will make a return on your investment. Important: The risk of loss correlates directly with the makeup of your stock and bond components. The risk of loss is higher if you use just a few stocks and bonds in your portfolio than it is if you invest in many different securities (using an ETF, for example).

A possible disadvantage of using a 60/40 portfolio is the work and cost involved in rebalancing. If the value of your stocks grows to where it exceeds 60 percent of your portfolio, you have to sell some stocks and buy bonds in order to maintain the right ratio. The same is true for the bond component. You can find detailed information in the guide to rebalancing. However, this disadvantage does not apply if you use a 60/40 ETF, as the fund managers take care of rebalancing the fund’s portfolio. If you use a robo advisor or other asset management service, the service provider handles rebalancing for you.

There are also other risks and disadvantages that apply to stock or bonds in general. In the last decade, the 60/40 rule with its high bond component has become the subject of some criticism. The reason for the criticism is that bonds have delivered poor returns or even losses in recent years.

You can find more information about investing in stocks and bonds in these guides:

• How to invest money in Switzerland
• How to minimize the costs when investing in bonds
• How to invest in bond ETFs
• How to invest in government bonds
• How to invest in a global stock index
• The pros and cons of investing with ETFs

Is a 60-40 portfolio profitable?

A comparison of historical performance shows that 60/40 portfolios have grown in value over both four-year and seven-year investment terms (see Table 3). But the positive performance was only due to growth in the value of the stock components. Over the same timespan, pure stock portfolios delivered much better performance than mixed portfolios with stocks and bonds. A pure bond portfolio would have lost value over the same timespan.

It is interesting to note that the 60/40 ETF used in the performance comparison had poorer performance than the combination of separate stock and bond ETFs.

Table 3: Performance comparison of a stock ETF, a bond ETF, and two 60/40 portfolios

Performance in CHF, accounting for dividends. Source: Justetf.com. Dates used for performance comparison: January 31, 2018; January 31, 2021; January 31, 2025. Performance figures do not account for possible stockbroker fees.

It is absolutely crucial to understand that past performance is not an indicator of future performance. There is no way to accurately predict the returns that a 60/40 portfolio could achieve in the future. That is all the more true for a 60/40 portfolio, which is exposed to both stock and bond markets.

However, it is worth noting that the aim of a 60/40 portfolio is not necessarily to achieve the highest possible return. Instead, this strategy targets long-term stability with regards to the value of your portfolio.

Are there alternatives to the 60/40 rule?

The growing criticism of classic 60/40 portfolios is primarily related to their relatively-high bond components. That, in turn, is directly related to the fact that stocks have historically delivered much higher returns than bonds.

If including bonds in your portfolio is important to you, it is also possible to use a smaller bond component. Bonds could make up 30, 20, or even 10 percent of your portfolio, for example. It is also possible to use bonds as a satellite component in a core-satellite strategy, while using a global stock portfolio as the core. 

Zugleich besteht die Möglichkeit, anstelle von Obligationen in andere defensive Anlageklassen zu investieren. Dazu gehören beispielsweise Geldmarktfonds oder klassische Zinsprodukte wie Sparkonten und Kassenobligationen. Beachten Sie aber, dass die hohe Sicherheit zulasten des Renditepotenzials geht.

You could also consider investing in other conservative asset classes instead of bonds. Examples include money market funds, and interest-bearing investments like savings accounts and medium-term notes. Be aware though that the lower risk of loss comes at the cost of lower potential returns.

Note: The information in this article is provided for informational purposes only, and should not be considered as investment advice. The publishers do not accept any liability in connection with this article.

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