A 60/40 Portfolio: The Arithmetic of Rebalancing

A 60/40 portfolio holds 60% in stocks and 40% in bonds. Its purpose is to choose a risk mix and keep it from drifting unnoticed. A simple example makes the rebalancing arithmetic easy to see.

A $100,000 example

Start with $60,000 in stocks and $40,000 in bonds. If stocks rise 10% and bonds are unchanged, the portfolio is worth $106,000: $66,000 in stocks and $40,000 in bonds. The new stock weight is about 62.3%, above the original 60% target.

Sixty percent of $106,000 is $63,600. To restore the mix, move $2,400 from stocks to bonds. Selling the full $6,000 gain and then buying back $3,600 of stocks produces the same allocation, but creates unnecessary trades. New contributions or cash distributions can sometimes do the job with fewer sales.

Choose the allocation before the interval

The familiar '100 minus your age' stock rule, is only a rough heuristic. Your horizon, income needs, capacity to absorb losses and the role of the money matter more than age alone. Bonds can also fall in price when yields rise; they are not a guaranteed offset to stocks.

Once a suitable allocation is chosen, decide whether to review it on a calendar schedule or when weights move beyond a preset band. Rebalancing controls drift; it does not ensure higher returns or remove losses. Account for taxes, spreads and transaction costs before trading.

The practical rule

Write down the target weights, the acceptable range around each, the review frequency and which accounts or contributions you will use. That turns 'sell high, buy low' from an appealing slogan into a repeatable portfolio decision.