Benchmark strategy - 60/40 Strategy
Last updated
Last updated
The most commonly known strategy is the 60/40 strategy. It is the most basic strategy of investing in 60% equities as offensive assets and 40% bonds as defensive assets, rebalanced on an annual basis. The higher the proportion of defensive assets, the lower the volatility and the smaller the losses. However, the expected return will be lower. Conversely, the more offensive assets you have, the higher the volatility and the greater the losses. We have chosen the 60/40 strategy as a representative benchmark strategy because it is the most commonly used strategy at the most common level and is the primary benchmark strategy for comparison with other strategies.
The 60/40 strategy stands as one of the most widely recognized investment approaches in the financial world. At its core, this strategy involves allocating 60% of the investment portfolio to equities, categorized as offensive assets, and the remaining 40% to bonds, classified as defensive assets. This allocation is typically rebalanced on an annual basis to maintain the desired asset mix.
Central to the 60/40 strategy is the delicate balance between risk and reward. By including a significant portion of defensive assets like bonds, investors aim to mitigate portfolio volatility and minimize potential losses during market downturns. However, this defensive stance also comes with a trade-off: lower expected returns compared to more aggressive investment strategies.
Conversely, increasing the allocation to offensive assets such as equities can enhance the potential for higher returns over the long term. However, this approach also exposes the portfolio to greater volatility and the risk of more substantial losses during market downturns.
The choice of the 60/40 strategy as a benchmark stems from its widespread use and simplicity. Many investors, both novice and experienced, prefer this approach because it is easy to understand and implement. In addition, the 60/40 strategy serves as a primary benchmark for comparing the performance of alternative investment strategies. For backtesting purposes, the benchmark can also be changed to the S&P500 or the Nasdaq.
