Avoid Market Volatility With This Classic 60/40 Investment Strategy

Motif Investing constantly looks for trends, ideas and world events that could create an investment opportunity, and then picks 10 to 30 related stocks to build portfolios around, weighing them based on their exposure to the coinciding idea, event or trend. The people at Motif have developed a portfolio that offers a balance between potential return and reduced volatility: the classic 60/40. The portfolio allocates 60 percent of its assets to stock and 40 percent to bonds, thus offering both hedging and potential return.

The Weight Of Tradition

The people behind the creation of this Classic 60/40 motif explained what they were thinking at the time they constructed the portfolio.

Simplicity is the ultimate sophistication, Leonardo da Vinci once said. Now, this adage could just as easily apply to investing, Motif assured.

The classic portfolio allocation model of 60 percent stocks and 40 percent bonds has proven effective repeatedly, providing generation after generation of investors and financial advisors with a balanced approach to investing.

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The strategy behind the 60-40 rule lies in modern portfolio theory, which prescribes that diversifying asset classes often can provide returns at lower volatility, Motif explained. In fact, between 1969 and 2009, a 60-40 index portfolio delivered just 2 percent lower returns than a 100 percent-stock portfolio, but with 40 percent lower volatility. The strategy can also outperform tactical asset allocation strategies over different time periods.

Performance And Allocation

While the Classic 60/40 motif has not managed to beat the market over the past year (or month), having lost 3.4 percent (but having gained 0.5 percent in the last month), this strategy implies low volatility levels and the potential for market beating returns over the longer term.

It should also be noted, it was stock ETFs that lost value over the past year. Meanwhile, bond ETFs returned a low, but solid 3 percent, on average.

In terms of asset allocation, 57.2 percent of the portfolios assets are placed in U.S.-listed ETFs that invest in U.S. stock, while the remaining 42.8 percent of assets were placed in U.S.-listed ETFs that invest in U.S. bonds.

Below is a detailed look at the ETFs in this particular portfolio.

A Closer Look At The Portfolio

Stock ETFs

  • 19.5 percent Vanguard Total Stock Market ETF (NYSE:VTI)
  • 19.1 percent Vanguard MSCI EAFE ETF (NYSE:VEA) a.k.a., Vanguard FTSE Developed Markets ETF
  • 18.7 percent Vanguard Emerging Markets Stock Index Fd (NYSE:VWO)

Bond ETFs

  • 21.4 percent iShares Barclays Aggregate Bond Fund (NYSE:AGG)
  • 21.4 percent Vanguard Charlotte Funds (NASDAQ:BNDX)

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.

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