Going with the old 60:40 Portfolio

There is one passive portfolio strategy which has been widely used by investment professionals for as long as I can remember. And it is the old 60:40 stocks/bonds portfolio. The 60% stock potion is there as the growth portion, while the 40% bond portion is there to provide protection in the event of a market drawdown. Ray Dalio's All-Weather takes the approach to balance the proportions according to risk. So, alongside the 15% weighting for gold and commodities, the stock weighting is lower than bonds as it is riskier i.e. more volatile. There is so an argument that you should alter the weighting according to your age, a younger person should have a higher stock portion, while an older person should have a higher bond portion.

Most investors would go with a combination of the VTI and BND ETFs. VTI tracks the total US Stock Market, while BND tracks the total US bond market. This is all well and good, until you look at their similar betas i.e. volatility. VTI has a beta of 1.04, while BND has a beta of 0.99. The purpose of a passive portfolio should be that you can set it and forget it. Your bond holding should not be volatile. It is for this reason that I will be going with the 1–3-year bond ETF, SHY. This has a beta of 0.24, or a quarter of the volatility of the market. It also has a slightly better yield than that of the BND (3.9%). Also, the yield of the ETF will reset quicker if the prevailing US Treasury yields were to move higher (as the underlying bonds are shorter duration). I have read that the yield from the SHY often trails the inflation rate. But at the moment it doesn't, as the NZ inflation rate is 2.7%. So at least for now, the real rate yield (above our inflation rate) is 1.2%. Important to remember, that the yields from Treasury securities are not taxed.

I will also be changing the stock ETF from VTI to VOO. The VOO ETF tracks the S&P 500. And while it is less diversified than the VTI (which has around 3,000 securities in it), the returns are better. It's easy to understand why the returns are better, as larger companies often have better economies of scale. Over the last five years, the VOO ETF has outperformed VTI by about 10%.

I think the combination of the low volatility SHY with the high-return VOO is quite a good mix. Considering my age (36), it is probably unwise for me to contribute a substantial amount to the SHY, but I should contribute some weighting too it as it will substantially reduce the volatility of this portfolio. Perhaps the traditional 60:40 portfolio applies too much weighting to the bond potion, considering my age. Maybe I would be wiser to go with an 80/20 ratio. But it is important to remember that this is only a small portion of my overall portfolio, so I don't need to be overly worried about limiting my returns. The point of my Interactive Brokers portfolio will be to 'set it and forget it'. I will see less volatility with a 60/40 split than I will with an 80/20 split. The 60:40 portfolio has had an annualised return of 9.16% since 1987, and a 9.76% annualised return for the last ten years. With a more balanced portfolio I will of course be less worried if we see a significant market correction at some point in 2026.