The 60/40 portfolio: rules, variants, and a backtest

The 60/40 portfolio holds 60 percent of its value in stocks and 40 percent in bonds, and periodically sells whichever has grown to buy whichever has shrunk so the weights return to 60 and 40. It is the default balanced portfolio in most of the developed world, the benchmark that other allocations are compared against, and the simplest strategy on this site. It is also a strategy, with rules that can be stated and tested, which is what this page does.

What are the exact rules?

The version tested here uses two funds: SPY for US large-cap stocks and TLT for long-term US Treasury bonds.

1. Hold 60 percent of the portfolio in SPY and 40 percent in TLT.
2. On the last trading day of each month, sell or buy each fund as needed to restore the 60/40 weights.

There is no signal, no lookback, and no cash position. The only decisions are the weights, the two funds, and the rebalancing schedule, and each of those decisions matters more than its simplicity suggests.

Why did 60/40 become the default?

The allocation predates modern portfolio theory but was justified by it. Harry Markowitz's 1952 work showed that combining assets with less than perfect correlation produces a portfolio with lower risk than the weighted average of its parts. Stocks and high-quality bonds have historically had low and often negative correlation, especially in equity selloffs, when investors sell risk assets and buy Treasuries. A portfolio that holds both therefore has a smoother path than either alone.

The specific 60/40 split has less theory behind it. It emerged from institutional practice in the mid-twentieth century as a compromise between growth and stability: enough equity to grow with the economy, enough bonds to cushion the falls and pay something along the way. Vanguard's balanced index fund, the most widely held implementation, adopted it in 1992. Its persistence is partly inertia and partly that, over most rolling ten-year periods since the 1970s, it has delivered a large share of the equity market's return with a much smaller share of its drawdown.

The mechanism that makes it more than a static blend is rebalancing. When stocks fall, the portfolio's equity weight drops below 60 percent, and the rebalance buys stocks at lower prices. When stocks rise, it trims them. Over long periods that discipline has added a small return premium relative to never rebalancing, and it enforces the behavior most investors find hardest: buying after declines.

When does it fail?

A 60/40 portfolio has exactly one diversification bet, and when it does not pay, nothing else in the portfolio helps.

Stocks and bonds fall together. This happens when inflation and interest rates rise faster than expected, because higher rates lower both the present value of future earnings and the price of existing bonds. 2022 was the clearest recent example, and one of the worst calendar years for 60/40 in the historical record, because the bond sleeve lost more than 30 percent for long Treasuries rather than offsetting the equity decline. The 1970s were an extended version of the same environment.

Long bond drawdowns. Using TLT for the bond sleeve maximizes the diversification benefit in equity selloffs and maximizes the damage when rates rise. Investors who chose TLT for its behavior in 2008 discovered its other behavior in 2022. Intermediate bonds split the difference, and the choice is worth backtesting explicitly rather than inheriting.

Concentration in one country. SPY is US large caps only. A 60/40 built on global equities behaves differently, and a US investor in the 2010s would have been glad of the home bias while a Japanese investor in the 1990s would not have been. Which case the next decade resembles is unknowable.

Prolonged equity bear markets. With 60 percent in stocks, the portfolio still falls substantially when stocks fall a lot. In 2008 a 60/40 portfolio with long Treasuries lost roughly a fifth of its value at the trough. That is much better than the equity market's decline of about half, and it is still a drawdown that many investors do not hold through.

What does a backtest show?

The card below is a live tear sheet of an ENSEMBLE model built from the prompt at the bottom of this page. The figures are computed by the platform from daily closing prices, net of a simulated transaction cost on each trade, and refresh nightly.

On the full tear sheet, compare the drawdown chart with SPY's. The equity selloffs of 2008 and 2020 are visibly shallower; 2022 is not, and the reason is the point of the section above. Then look at the trade count. Monthly rebalancing of two funds trades every month by construction, so this model shows a high number of small trades. That is what a monthly rebalance costs, and it is why most implementations rebalance less often.

For the definitions behind each number on the card, see backtest metrics explained. For a walkthrough of building and reading a portfolio like this from scratch, see how to backtest a portfolio.

Variants: permanent portfolio and all weather

Two well-known fixed-weight portfolios extend 60/40 by adding assets meant to cover the regimes it misses. Both can be built from a one-sentence prompt.

The permanent portfolio. Harry Browne proposed it in the early 1980s and described it fully in Fail-Safe Investing (1999): 25 percent each in stocks, long-term Treasuries, gold, and cash, rebalanced when any asset drifts far from its target. Each asset is meant to lead in one economic condition: stocks in prosperity, long bonds in deflation, gold in inflation, cash in recession. The result has historically had roughly half the volatility of a 60/40 portfolio and a lower return. Prompt: "25% each in SPY, TLT, GLD and BIL, rebalanced annually."

The all weather portfolio. Bridgewater's institutional All Weather fund is a levered risk parity strategy; the unlevered retail allocation that Ray Dalio described to Tony Robbins in Money: Master the Game (2014) is 30 percent stocks, 40 percent long Treasuries, 15 percent intermediate Treasuries, 7.5 percent gold, and 7.5 percent commodities. It is bond-heavy by design, which served it well while rates fell and badly in 2022. Prompt: "30% SPY, 40% TLT, 15% IEF, 7.5% GLD and 7.5% DBC, rebalanced annually." The risk parity page explains the logic that produces weights like these.

Both variants trade some expected return for smoother paths across a wider range of environments. Whether that trade is worth it depends on the investor's horizon and tolerance, which is a question for the investor rather than for the backtest.

How to run it and change it

Variations worth testing:

• Rebalancing frequency. Change "monthly" to "quarterly" or "annually" and compare returns, drawdowns, and trade count. The trade count will fall by an order of magnitude; the other metrics usually move much less.
• Bond duration. Replace TLT with IEF or AGG. Expect a shallower 2022 and a shallower 2008 cushion.
• Global equities. Replace SPY with VT or split 60 percent between SPY and VEA.
• A trend filter. "60% SPY and 40% TLT, but move the SPY sleeve to BIL when SPY closes below its 200-day moving average." This is the classic way to add downside protection to a static allocation, and the 200-day moving average page explains what it does and costs.
• Threshold rebalancing. Ask for rebalancing only when a weight drifts more than five percentage points from target. This is how many advisers run the portfolio in practice.

Practical notes

The 60/40 portfolio is the benchmark, and that is a reason to backtest it before anything else. Every other strategy on this site should be compared against it in the same window, because a tactical rule that fails to beat a static blend of two index funds after costs is not worth its complexity.

It is also the cheapest strategy to run, with low turnover, low costs, and, with annual rebalancing, mostly long-term capital gains. Tactical strategies give up that efficiency to buy drawdown protection. Seeing both tear sheets side by side is the only honest way to decide whether the protection is worth the price.

Backtests are hypothetical, past performance does not guarantee future results, and ENSEMBLE is research software rather than an investment adviser.