Building an investment portfolio is one of the most critical things anyone concerned about his or her financial healthy must do. A person with a high net worth can live comfortably in retirement. The years leading up to retirement could end up being relatively stress-free from a fiscal perspective. How money is allocated into an investment portfolio contributes significantly as to whether or not a wise strategy is employed. The 60/40 portfolio is a commonplace among investors, but has this approach to saving become outdated?
No definitive answer exists to this question. Some financial experts suggest the 60/40 split is still viable and others consider it passe. Individual opinions are going to vary.
What is the 60/40 Split Strategy?
The concept of a 60/40 portfolio split is fairly basic. The division refers to putting 60% of one’s money into stocks and then 40% into bonds. The idea at work here is the riskier venture of putting money into stocks can be offset by very low-risk bonds. The strategy is not exactly new nor revolutionary.
Portfolio hedging makes sense. Stocks can — and do — lost value with the ups and downs of the market. Bonds are deemed much more stable. Bonds could act as a proper hedge to losses. Not everyone agrees, though.
The Trouble with the 60/40 Portfolio Concept
Probably the most glaring problem with the 60/40 portfolio concept is bonds do not pay high rates of interest. Treasury bonds, in particular, have not delivered the interest payments that were common in decades past. Putting 40% of one’s investment capital into bonds might lead to garnering far less interest that would be the case with other vehicles. A peer-to-peer lending business that supports title loan issuing, for example, would pay far greater interest. Of course, this type of investment comes with added risk.
Other investment vehicles can be used in place of bonds. Financial experts may suggest keeping money in liquid assets, but others may suggest illiquid assets are fine. Certificates of deposits could act as alternatives to bonds, but these accounts are not known for high-interest rates. Others may look towards real estate investment trusts. Then there are low-risk mutual funds that invest in a cross-sector of bonds and other assets.
Not all bonds pay low rates of interest. Most people focus on federal government treasury bonds, which can be a good plan. The low-interest rates, however, have surely turned many investors off. Municipal bonds can remain a viable option. These bonds do pay a higher rate of interest. State and city bonds are usually federally insured against default, which eliminates the risk of losing the initial capital.
Investments into corporate bonds may be worth considering, but these investments would be far riskier since they are not insured. The high rate of interest associated with “junk bonds” comes with the potential for a total loss on a default.
Talk with an Advisor
Anyone who is unsure of how to allocate assets in a diverse portfolio may wish to discuss matter with a financial advisor. Doing so might add a little perspective to the process of how to properly distribute money in a desirable manner. 6040 may or may not be the right way to go. Asking for advice can clarify a few points.