Beginner classic configuration strategy: 60/40 combination

Diversification is an investment strategy where different types of assets are added to a portfolio to try to mitigate risk and volatility. Although many people are familiar with this concept, achieving effective diversification can be challenging without professional knowledge or sufficient capital.

Since ETFs are made up of multiple stocks or other assets, they may be a convenient tool that can help you easily build a diversified portfolio. For example, if you want to gain exposure to all the value stocks in the S&P 500 index, consider an ETF that tracks the performance of the S&P 500 Value index. This may save your time in picking individual stocks.

Moreover, ETFs generally require less initial investment than investing in individual stocks or other asset classes.

While mutual funds also offer similar advantages, ETFs provide greater convenience for those who already have stock accounts, since they can trade ETF shares in a similar way to stocks and enjoy real-time price transparency.

How can we utilize ETFs for diversified investment?

We can start to determine our desired ETF by looking at the asset category it tracks. But how do we decide on the specific allocation of each item in the investment portfolio? In this lesson, we'll be looking at examples of three classic investment portfolios.

60/40 Portfolio: beginner-friendly investment strategy

Created by John Bogle, known as the "father of index funds" and founder of Vanguard Group, this portfolio is simple to understand. It emphasizes some of his key investment principles, including risk avoidance, diversified investment, low costs, and persistence.

By investing in both asset classes, investors can potentially gain higher returns while mitigating the risk of downturns in the stock market by diversifying their holdings. If you're interested in building a 60/40 portfolio with ETFs, you might consider holding a total stock ETF and a medium-term bond (5-10 year maturity) ETF.

For example, you may build the portfolio with $Vanguard Total Stock Market ETF (VTI.US)$ and $iShares 7-10 Year Treasury Bond ETF (IEF.US)$ . (*The largest ETF in the same category of us stocks as of November 17, 2024)

The allocation of stocks and bonds can be adjusted according to your age. Generally, the younger an investor is, the more risk they may be willing to take on, so they may increase the share of stocks to as much as 80%. Conversely, as they get older and their risk tolerance decreases, they may reduce the share of stocks to as little as 50%.

However, the market is always changing. It is argued that the 60/40 portfolio may no longer be applicable to today's market conditions. To optimize your investment portfolio, you may want to consider adding more asset categories or adjusting the allocation of each item.

The next two portfolios we'll introduce are popular alternatives. You may click to view the next video.