You’ve seen the term 60/40 portfolio, but what actually is it?
In 1952, “Modern Portfolio Theory” was introduced by economist Harry Markowitz as a way to optimize risk-adjusted returns with diversification. The theory moved portfolio construction towards a wholistic analysis of how an asset fits into a portfolio and investor‘s overall goal. One way to diversify a portfolio and reduce risk is to invest in a combination of stocks and bonds.
Then, along came Jack Bogle. The Vanguard founder popularized index funds and diversifying portfolios with 60% in stocks and 40% in bonds. Overtime, 60/40 became a benchmark for what a balanced portfolio looks like.
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