There are a lot of numbers, formulas and ratios in personal finance, and one that you have likely heard of is the 60/40 portfolio or investment strategy. This is a type of investment strategy that allocates 60% of the portfolio to stocks (equities) and 40% to bonds (fixed income). This approach strives to balance the higher growth potential of stocks with the stability and income generation of bonds. By giving a slight edge to equities, it seeks to achieve a blend of growth and risk management, recognizing that while equities offer higher returns, they also come with increased risk.
While younger investors may want to invest even more into equities, for most in their 30s and 40s, this should be a good allocation for most. On the two ends of the spectrum, you may have someone approaching retirement who will try to avoid risk and move most of their money into bonds and away from equites. While someone in their early 20s, just getting into their first career, with no family or much debt or financial obligations to worry about, may go hardcore the other way: as much as 80 or even 100% into equities and not much into bonds. While extremes are hardly ideal, it all comes down to individual preferences, risk tolerance and other factors.
Example of a $10,000 60/40 Portfolio for Canadian Investors
Let us illustrate with some sample portfolio to show this strategy and how it works:
Stocks (60% – $6,000)
- Canadian Large-Cap Stocks:
- iShares S&P/TSX 60 Index ETF (XIU) or Vanguard FTSE Canada All Cap Index ETF (VCN)
- Amount: $2,000
- International Stocks:
- Vanguard FTSE All-World ex Canada Index ETF (VXC) or iShares MSCI ACWI ex U.S. ETF (XAW)
- Amount: $1,500
- Canadian Mid/Small-Cap Stocks:
- iShares S&P/TSX Completion Index ETF (XMD) or BMO S&P/TSX Small Cap Index ETF (ZSB)
- Amount: $1,000
- Sector or Growth Stocks:
- iShares NASDAQ 100 Index ETF (XQQ) or BMO Global Infrastructure Index ETF (ZGI)
- Amount: $1,500 Bonds (40% – $4,000)
- Canadian Government Bonds:
- iShares Core Canadian Universe Bond Index ETF (XBB) or BMO Aggregate Bond Index ETF (ZAG)
- Amount: $2,000
- Canadian Corporate Bonds:
- iShares Canadian Corporate Bond Index ETF (XCB) or Vanguard Canadian Corporate Bond Index ETF (VCB)
- Amount: $1,000
- International Bonds:
- Vanguard Global ex-US Aggregate Bond Index ETF (CAD-hedged) (VBG) or BMO Global Bond Hedged to CAD Index ETF (ZGB)
- Amount: $1,000
Considerations for Canadian Investors
When managing a 60/40 portfolio, consider key factors to optimize your strategy. Be mindful of currency risk when investing internationally and use hedged ETFs to mitigate exposure. Leverage tax-advantaged accounts like the TFSA and RRSP to minimize tax on gains. Periodically rebalance your portfolio to maintain the desired allocation and ensure diversification within stocks and bonds to spread risk. Keep an eye on expense ratios to minimize costs, and most importantly, align your investments with your long-term goals and risk tolerance.
This 60/40 is a simplified approach to investing, which offers a blend of growth potential from equities and stability from fixed-income investments, aiming to achieve a balanced approach to investing for investors. Depending on your age, you may change this ratio in favour of one type of securities vs. another. But always start from the 60/40 approach and then tweak things depending on the factors mentioned above (age, risk tolerance, investing knowledge etc.