The 60/40 portfolio. Long considered the most important long-term 401(k) investment management theory. Harry Markowitz won a Nobel Prize in 1990 for the development of the theory.
60 percent stock and 40 percent bonds. A sure-fire strategy for long-term investment management success. The idea is to keep those approximate percentages at all times. To not put all your stock and bond market investments in the same basket.
Another name for it is diversification. Or “modern portfolio theory.” Along the “efficient frontier.” Reduce the risk of all your stock and bond market investments.
You don’t have to understand these investment management terms. Only divide your 401(k) mutual funds in a mixture of stock and bonds. As close to those percentages as possible.
Here is the problem. In 2022, the S&P 500 lost 18 percent. And the Bloomberg U.S. Aggregate Bond Index lost 13 percent. Diversification delivered a “double whammy” in 2022.
Part of the problem is determining the correct stock and bond market percentages to own. To best align with your stock and bond market risk tolerance.
You don’t have the time. Or the expertise. Nor the experience of knowing if a 50/50 or a 60/40 stock and bond market split is in line with your risk tolerance.
Target date mutual funds promote this same concept. Sold by the year provided in the title of the mutual fund.
The longer the year in the target date mutual fund title, the more money invested in the stock market. The less bond market investments in that mutual fund.
The shorter the year of the target date mutual fund, the less money invested in bonds. And the less money invested in stocks.
So what is the ideal mix? No one knows. And don’t think if they knew, they would share it with any individual 401(k) investor.
The best diversification strategy for your 401(k) is one you are comfortable with. After a review from independent, third-party, mutual fund rankings sources.
This analysis can’t come from your company 401(k) sponsor (your company). Or your company 401(k) provider (Schwab, Fidelity, Empower, etc.).
Remember this tiny piece of wisdom. “That is like the fox watching the hen house.”
You need an experienced 401(k) investment advice provider. With no affiliation with your company 401(k). Who is not paid to “sell you something.” And has a legal obligation to act in your best interest.
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