What it means
The logic rests on the fact that shares and high quality bonds usually behave differently in the same conditions. When equity markets fall on recession fears, government bonds often rise as interest rates are cut, so holding both smooths the ride even though it caps the best years.
For a business, this thinking applies to reserve funds, pension schemes and founder wealth held outside the company. An operating business is already a concentrated, high risk equity bet, so the money held outside it is usually better placed in something steadier.
Implementation is mostly about choosing target weights and then sticking to them. The portfolio is rebalanced periodically, typically once or twice a year, by selling whichever asset class has grown beyond its target and buying the one that has lagged.
That rebalancing discipline is where much of the value comes from, because it forces selling into strength and buying into weakness. Most investors find that emotionally difficult, which is precisely why writing the rule down in advance helps.
The 60/40 split is a starting point rather than a law. Someone with a long horizon and steady income might sit at 80/20, a retiree drawing income might sit at 40/60, and many modern balanced portfolios add property, infrastructure or commodities as a third leg.
In practice
Real-world examples.
Example
A family business sells a warehouse for $2,000,000 and places the proceeds in a 60/40 balanced portfolio while deciding what to do next. When equity markets fall 20% the following year, the fund loses roughly 11% rather than 20%, which keeps the owners from selling at the bottom.
Example
A company pension scheme with a mix of members in their thirties and members near retirement adopts a balanced default fund. It gives younger members meaningful growth exposure while limiting the damage to older members who cannot wait a decade for a recovery.
Example
A software founder holding most of her wealth in unlisted company shares puts her liquid savings into a conservative balanced mix of 40% equities and 60% bonds. She reasons that her overall risk is already extreme, so the outside money should behave as ballast.
Formula
Calculation
Expected portfolio return = sum of (asset weight x expected asset return)
A charity holds a $500,000 reserve fund in a balanced strategy of 60% equities and 40% bonds, with long-run expected returns of 8% for equities and 3.5% for bonds.
Equity contribution = 60% x 8% = 4.8%
Bond contribution = 40% x 3.5% = 1.4%
Expected portfolio return = 4.8% + 1.4% = 6.2%
Expected annual gain = $500,000 x 6.2% = $31,000
Now look at rebalancing. The fund starts with $300,000 in equities and $200,000 in bonds. Over one year equities return 18% and bonds return 2%.
Equities = $300,000 x 1.18 = $354,000
Bonds = $200,000 x 1.02 = $204,000
Total portfolio = $354,000 + $204,000 = $558,000
The equity target is 60% x $558,000 = $334,800, but the actual equity holding is $354,000.
Amount to sell from equities = $354,000 - $334,800 = $19,200
Moving that into bonds gives $204,000 + $19,200 = $223,200, which is exactly 40% of $558,000. The fund has taken profit from the strong asset and restored its intended risk level.Case study
Seen in the real world.
Marlow Foundry Group is a fictional engineering firm used purely as an illustrative example. After a good decade it built a $4,000,000 rainy day fund, which the finance director initially held entirely in short-dated deposits earning about 1.5%, or $60,000 a year.
The board agreed a written policy moving the fund into a balanced 55% equity, 45% bond allocation, rebalanced each January, with a rule that no more than $500,000 could be withdrawn in any twelve-month period. Over the following years the fund produced noticeably better returns than deposits, though it did fall by around 9% in one difficult year.
The illustrative moral is that the written rebalancing rule mattered more than the exact split. When the difficult year came, the policy told the finance director to buy more equities rather than to panic, and the board had already agreed to that in calmer conditions.
Watch out
Common mistakes.
- Assuming a balanced portfolio cannot lose money, when both shares and bonds can fall together, as they did when interest rates rose sharply.
- Setting target weights and then never rebalancing, so a long bull market quietly turns a 60/40 fund into an 80/20 fund.
- Judging the strategy over one year, when the whole point is to smooth returns across a full market cycle.
Questions
People also ask.
Is 60/40 still the right mix?
It remains a sensible default, but the appropriate split depends on your time horizon, income needs and tolerance for a bad year, not on tradition.
How often should a balanced portfolio be rebalanced?
Annually or semi-annually is enough for most investors, and many use a tolerance band such as rebalancing whenever a weight drifts more than five percentage points from target.
Does a balanced strategy need expensive management?
No, it can be run cheaply with two or three low-cost index funds, and high fees are one of the most reliable ways to erode the modest edge it offers.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%