The simplest way to implement a 60/40 portfolio is through a single fund option because you won’t need to rebalance it over time—that’s done by the fund’s portfolio manager.
But you may have opted for multiple funds in a model portfolio. Or, even if you’re in only one fund, the asset allocation may no longer be appropriate as time passes. In either case, Schlanger said, you should periodically revisit the portfolio to:
- Reassess your situation to determine whether the asset allocation is still right for you, and if it no longer is, move to a new allocation.
- When appropriate, rebalance the portfolio back to its target allocation.
On the first point, Schlanger said: “Life happens, things change. Your financial situation and goals may have evolved since you first selected that target asset allocation years or decades ago. There’s nothing wrong with changing your investment strategy, as long as it’s driven by careful consideration, not by market noise.”
On the second point, without rebalancing, equities tend to become a larger share of the portfolio over time. Rebalancing reduces overall portfolio volatility by keeping your allocation to equities and other risky assets constant. There are multiple approaches for when to rebalance—calendar-based, threshold-based, or a combination of the two. Vanguard’s research paper on this subject suggests that, for most investors, rebalancing on an annual basis is adequate.
“Whether it’s 60/40 or another asset allocation, rebalancing will help make sure your portfolio is consistent with your risk tolerance,” Schlanger said.