Research Library · Study 11
The 60/40 Portfolio and Rebalancing: What Vanguard Found
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Overview
A 60/40 portfolio puts 60% of your money in shares and 40% in bonds. It’s one of the simplest and most widely used mixes in investing. Keeping it at 60/40 means rebalancing: now and then, moving money from whatever has grown back to whatever has shrunk.
- Timeframe
- Years to decades, with a check once or twice a year
- Markets
- Share funds and bond funds, or a single ready-made fund
- Difficulty
- Beginner
Why mix shares and bonds?
Shares have grown more over the long run but can fall hard. Bonds have usually grown more slowly and swung less. Mixing them aims for a smoother ride than shares alone, at the cost of some growth.
More bonds means a steadier but slower portfolio. More shares means faster but bumpier. 60/40 is a middle setting, not a magic number.
More shares or more bonds?
| Mix (shares / bonds) | Growth over the long run | How bumpy |
|---|---|---|
| 100 / 0 | Fastest | Bumpiest |
| 80 / 20 | Fast | Bumpy |
| 60 / 40 | Middle | Middle |
| 40 / 60 | Slower | Steadier |
| 20 / 80 | Slowest | Steadiest |
A general pattern from the past, not a promise for any one year.
Why mixes drift
If shares rise faster than bonds, your 60/40 mix slowly becomes 70/30, then 80/20, without you doing anything. You end up taking more risk than you chose.
How a 60/40 mix drifts if you never rebalance
- Share of the portfolio in shares
Made-up example: shares grow 8% a year and bonds 4%. Without doing anything, you end up with nearly 70% in shares: more risk than you chose.
Vanguard’s research tested this on US shares and bonds from 1926 to 2009. A 60/40 portfolio that was never rebalanced drifted to more than 84% shares on average. It returned a little more, 9.1% a year against about 8.5% for rebalanced versions, but it swung much more: a standard deviation of 14.4% a year against about 12%1.
Vanguard’s test, US shares and bonds 1926 to 2009
| Average in shares | Return a year | Swing (standard deviation) | |
|---|---|---|---|
| Never rebalanced | Over 84% | 9.1% | 14.4% |
| Rebalanced | About 60% | About 8.5% | About 12% |
Never rebalancing earned a little more, but only by quietly taking much more risk.
How often to rebalance
The study found no single best schedule. For most broad share-and-bond portfolios, checking once or twice a year and rebalancing only when the mix has drifted by 5 percentage points or more gave a sensible balance between keeping risk in line and keeping costs down1.
Rebalancing more often, say every month, barely changed the risk and added costs. Never rebalancing let risk creep up1.
A 5-point band around a 60% target
Check once or twice a year on a set date. Only act if shares are 5 points or more away from 60%.
The catch
The mix relies on shares and bonds not falling together. Usually they haven’t, but in 2022, as interest rates rose quickly, both fell sharply in the same year.
Rebalancing also feels uncomfortable: it means selling what has done well and buying what has done badly. That discipline is the point, but it takes nerve.
The usual pattern, and 2022
Most years
- When shares fall, bonds often hold up or rise
- The bonds soften the fall
2022
- Interest rates rose quickly
- Shares and bonds both fell sharply
- The mix cushioned less than usual
60/40 portfolio rules
Entry
- Choose your mix based on when you need the money and how you’d cope with a fall. 60/40 is a common middle choice.
- Use broad, low-cost funds: a global share fund and a bond fund, or one ready-made fund with a fixed mix.
- Hold them in a tax-free or pension account if you can.
Exit
- As the date you need the money gets closer, shift gradually towards more bonds or cash.
Risk
- Check your mix once or twice a year on a set date.
- Rebalance if any part has drifted 5 percentage points or more from your target.
- Rebalance with new money first, by topping up what has shrunk. It saves selling and dealing costs.
Worked example: a yearly check
- You start with £10,000: £6,000 in a share fund and £4,000 in a bond fund.
- A year later shares have risen to £7,400 and bonds are flat at £4,000. Total £11,400. Shares are now 7,400 ÷ 11,400 ≈ 65% of the portfolio.
- That’s 5 percentage points over target, so you rebalance. 60% of £11,400 is £6,840. Move £560 from shares to bonds, or add new money to bonds instead.
Pros and cons of a 60/40 portfolio
Strengths
- Simple, cheap and easy to stick to.
- Usually a smoother ride than shares alone.
- Rebalancing keeps your risk where you chose it.
Weaknesses
- Grows more slowly than all shares over long periods.
- Shares and bonds can fall together, as in 2022.
- Rebalancing means selling winners, which feels wrong.
Key terms
- Asset allocation
- How your money is split between types of investment, such as shares and bonds.
- 60/40 portfolio
- A portfolio with 60% in shares and 40% in bonds.
- Rebalancing
- Moving money between investments to get back to your chosen mix.
- Drift
- Your mix moving away from its target as investments grow at different speeds.
- Standard deviation
- A measure of how much returns swing around their average. Higher means bumpier.
Sources
Numbers in the lesson, like 1, point to these sources.
Lesson complete
You have reached the end of the lesson. Now test what you learned with the five-level quiz.
Quiz zone
Test yourself: The 60/40 portfolio and rebalancing quiz
Five levels, from the basics to expert judgment. Clear each level to unlock the next.
- Level 1: Foundations. Recognise the strategy and its vocabulary.
- Level 2: Mechanics. Know how the signals and rules work, and why.
- Level 3: Application. Apply the rules to realistic chart situations.
- Level 4: Numbers & risk. Size, measure and manage the trade with real calculations.
- Level 5: Mastery. Judge edge cases, failure modes and market conditions.
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The questions only. Answers and explanations appear when you take the quiz above.
Level 1: Know the basics
What does a 60/40 portfolio hold?
- 60% cash and 40% gold
- 60% shares and 40% bonds
- 60 shares and 40 bonds
- 60% bonds and 40% shares
What does rebalancing mean?
- Changing your mix every month
- Moving money back to your chosen mix
- Buying whatever rose most
- Selling everything
True or false: if you never rebalance, your mix stays at 60/40 for ever.
True or false?
Adding more bonds to a portfolio usually makes it…
- steadier but slower-growing
- exactly the same
- faster and bumpier
- guaranteed not to fall
Level 2: Understand how it works
In Vanguard’s study, what did a 60/40 portfolio drift to, on average, if never rebalanced?
- More than 84% shares
- Exactly 60% shares
- About 40% shares
- 100% bonds
The never-rebalanced portfolio returned a little more. What was the trade-off?
- Much bigger swings: about 14.4% a year against about 12%
- It returned much less
- No trade-off
- Lower fees
What schedule did the study suggest for most investors?
- Never rebalance
- Check once or twice a year, and rebalance if drift is 5 points or more
- Rebalance every day
- Rebalance when the news is bad
True or false: rebalancing every month cut risk much more than once a year.
True or false?
Why mix shares and bonds at all?
- For a smoother ride than shares alone, at the cost of some growth
- To guarantee no losses
- Because bonds always rise
- To grow faster than shares
Level 3: Use it
Your target is 60/40. At your yearly check you’re at 62/38. What do you do?
- Rebalance straight away
- Sell all your shares
- Nothing: it’s within the 5-point band
- Change your target to 62/38
You’re at 67/33 and you have new money to invest. What’s the cheapest way to rebalance?
- Sell bonds
- Do nothing
- Put the new money into shares
- Put the new money into bonds
True or false: a ready-made fund with a fixed mix of shares and bonds rebalances for you.
True or false?
You need the money in two years. Compared with someone saving for 25 years, you’d usually hold…
- exactly the same
- more shares
- more bonds or cash
- only one share
Shares had a great year and you’re now well over 60%. Rebalancing means selling some shares. Why does that feel hard?
- It means selling what has done well and buying what has done badly
- It costs nothing
- It’s against the rules
- It always loses money
Where do the rules suggest holding your 60/40 funds?
- It doesn’t matter at all
- In a tax-free or pension account if you can
- In cash under the mattress
- In a trading account with leverage
Level 4: Work out the numbers
Your portfolio is £20,000 with a 60/40 target. How much should be in shares, in pounds?
Type a number (in shares).
Same £20,000 with a 60/40 target. How much should be in bonds, in pounds?
Type a number (in bonds).
You hold £7,000 in shares and £3,000 in bonds. What percentage of your portfolio is in shares?
Type a number (%).
Your target is 60% shares and you’re now at 67%. How many percentage points have you drifted?
Type a number (points).
Shares £7,400 and bonds £4,000. What percentage is in shares? Round to the nearest whole number.
Type a number (%).
Same portfolio: total £11,400, target 60% shares. You hold £7,400 in shares. How much should you move from shares to bonds, in pounds?
Type a number (to move).
Shares £8,100 and bonds £3,900, target 60/40. How much must move from shares to bonds, in pounds?
Type a number (to move).
Level 5: Judge the evidence
The study used US data from 1926 to 2009. What is a sensible caution?
- It’s too recent to matter
- Other countries and future periods may behave differently
- It’s guaranteed to hold everywhere
- It only applies to gold
Why did 2022 matter for 60/40 investors?
- Bonds doubled
- Nothing happened
- Shares rose 50%
- Shares and bonds both fell sharply, so the mix cushioned less than usual
True or false: the never-rebalanced portfolio had a higher return, so it was simply the better choice.
True or false?
What is the main job of rebalancing?
- Predicting the market
- Making the most money possible
- Keeping your risk at the level you chose
- Avoiding all losses
Is 60/40 the right mix for everyone?
- Only for professionals
- Only in the US
- Yes, always
- No: it’s a common middle choice. The right mix depends on when you need the money and how you’d cope with a fall
Why does rebalancing with new money first save costs?
- Brokers refund rebalancing
- You top up what has shrunk instead of selling, so there’s less dealing and possibly less tax
- New money is free
- It doesn’t
What does a higher standard deviation tell you about a portfolio?
- It always earns more
- It has lower fees
- Its returns swing more around their average: it’s bumpier
- It never falls
A friend says “I never rebalance because my returns were higher”. What would you point out?
- They must rebalance daily
- Rebalancing is illegal
- Their portfolio probably now holds far more shares than they meant, so their risk has crept up
- They’re right in every way