With stock market risks emerging, is now the time to consider the 60/40 portfolio?
The stock marketâs performed well recently. But risks are definitely emerging. For a start, geopolitical conflict threatens to slow the global economy. Additionally, thereâs the possibility of a white collar job wipeout in the years ahead.
Wondering how to protect your ISA or Self-Invested Personal Pension (SIPP) from an equity market meltdown? The answer could lie in the 60/40 portfolio.
What is the 60/40 portfolio?
This splitâs an investment portfolio designed to combine growth potential with stability. It involves putting 60% of your capital in stocks and 40% in bonds to create a âbalancedâ portfolio.
The idea behind this asset allocation is that it should smooth out investment returns over time, providing healthy long-term returns with significantly lower levels of volatility than a portfolio that only contains shares.
Stocks (which are higher-risk, higher-return assets) and bonds (lower risk, lower return) tend to move in opposite directions, so if stocks fall, bonds should provide a buffer, protecting the portfolio.
Itâs worth noting that this portfolio â which was first devised in the early 1950s â has been popular with financial advisers for decades. Because it has historically performed very well over the long term, returning around 8% a year with less turbulence than a pure stock portfolio (helping investors stick to their long-term investment strategies).
That said, it doesnât guarantee a positive return every year. Over the last 25 years, for example, a portfolio consisting of 60% exposure to the S&P 500 index and 40% to the iShares Core US Aggregate Bond ETF would have had six negative years (two of these years were pretty close to flat).
Adding bonds to an ISA or SIPP
Iâll point out that today, itâs easy to add bond exposure to an ISA or SIPP. An investor doesnât need to buy individual bonds issued by governments or companies. Instead they can simply buy an ETF or actively managed fund.
On platforms such as Hargreaves Lansdown and Interactive Investor, there are tons of different bond funds. And many have low fees.
One that could potentially be worth checking out is the iShares Core Global Aggregate Bond UCITS ETF (LSE: AGBP). This provides exposure to a mix of government and corporate bonds (about 20,000 bonds in total).
The focus is on âinvestment gradeâ bonds. These are lower risk than non-investment grade securities (aka âhigh-yieldâ or âjunkâ bonds).
This particular version of the ETF is currency hedged. So UK investors shouldnât be impacted by exchange rates.
In terms of performance, the ETF has returned about 5% over the last year and about 15% over the last three (to the end of February).
It should be noted however, that it had a very bad year in 2022 (returning about -12%) when interest rates rose sharply. This can be explained by the fact that when interest rates go up, bond prices tend to go down (rate increases are a risk in the future).
Fees are just 0.10% a year. So it’s a very cost-effective product.
Combined with a selection of stocks, it could potentially help investors achieve their long-term financial goals.
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Edward Sheldon has no positions in any securities mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
