With stock market risks emerging, now is the time to consider a 60/40 portfolio?
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The stock market has done well recently. But risks inevitably arise. First, geopolitical conflicts threaten to slow down the global economy. Additionally, it is possible that white-collar work will be extinguished in the coming years.
Wondering how to protect your ISA or Self-Invested Personal Pension (SIPP) from a stock market downturn? The answer may be in a 60/40 portfolio.
What is a 60/40 portfolio?
This division is an investment portfolio designed to combine growth potential and stability. It involves putting 60% of your capital in stocks and 40% in bonds to create a ‘balanced’ portfolio.
The idea behind this asset allocation is that it should improve investment returns over time, providing healthy long-term returns with much lower levels of volatility than a portfolio that only contains stocks.
Stocks (high risk, high return assets) and bonds (low risk, low return) tend to move in opposite directions, so if stocks fall, bonds should provide a buffer, protecting the portfolio.
It’s worth noting that this portfolio – developed in the early 1950s – has been a favorite of financial advisors for decades. Because it has historically performed so well over the long term, it returns about 8% per year with less volatility than a pure stock portfolio (to help investors stick to their long-term investment strategies).
That said, it doesn’t guarantee good returns every year. In the last 25 years, for example, the portfolio included 60% exposure S&P 500 index and 40% to iShares Core US Aggregate Bond ETF you would have had six negative years (two of these years are very close to flat).
Adding bonds to an ISA or SIPP
I will point out that today, it is easy to add bond exposure to an ISA or SIPP. An investor does not need to buy individual bonds issued by governments or corporations. Instead they can simply buy an ETF or a fully managed fund.
On platforms like Hargreaves Lansdown and Interactive Investor, there are tons of different bond funds. And many have low incomes.
One that might be worth checking out is this iShares Core Global Aggregate Bond UCITS ETF (LSE: AGBP). This provides exposure to a mix of government and corporate bonds (approximately 20,000 bonds in total).
The focus is on ‘investment grade’ bonds. These are lower risk than non-investment grade securities (called ‘high yield’ or ‘junk bonds’).
This particular version of an ETF is a currency hedge. So UK investors should not be affected by exchange rates.
In terms of performance, the ETF has returned about 5% over the past year and about 15% over the past three years (through the end of February).
It should be noted however, that there was a very bad year in 2022 (returns of about -12%) when interest rates increased significantly. 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 only 0.10% per year. So it’s a very affordable product.
Combined with stock selection, it can help investors achieve their long-term financial goals.
