There are lots of bits of conventional financial wisdom that won't always serve you well. For example, many people recommend buying a home instead of renting, but that's not everyone's best route due to closing costs, homeownership expenses such as property taxes and maintenance, and occasionally, overvalued real estate markets.

Similarly, many have long recommended keeping 60% of your portfolio in stocks and 40% in bonds to reduce risk through diversification. That might not be best, though. Here's a closer look at the issue and the asset-allocation strategy that might be better for you.

Two hands playing with a folded paper game, with the four parts labeled stocks, bonds, commodities, and mutual funds.

Image source: Getty Images.

Stocks outperform bonds

A key thing to understand is that stocks generally outperform bonds over most long periods (and many short periods) -- by a lot. Check out this data from Wharton Business School professor Jeremy Siegel, who has calculated the average returns for stocks, bonds, bills, gold, and the dollar between 1802 and 2012:

Asset Class

Annualized Nominal Return









U.S. Dollar


Source: Stocks for the Long Run, by Jeremy Siegel.

The annualized rate for stocks from 1926 to 2012 -- a period you might find more relevant to your life -- was 9.6%, by the way, versus 5.7% for long-term government bonds. Indeed, Siegel's data shows stocks outperforming bonds in 96% of all 20-year holding periods between 1871 and 2012 and in 99% of all 30-year holding periods.

The current economic environment matters

Despite the better performance of stocks, there are times when the stock market will slump, and sometimes it will remain slumped for longer than you'd like. Bonds are one way to try to offset that, because many times, bond prices will rise when stocks fall, and vice versa.

If you're wondering why that is, think of interest rates. High rates can make it hard for businesses to borrow money, grow, and prosper, making stocks a bit less appealing. (Bank stocks, though, tend to do well with rising rates.) Rising rates tend to depress bond prices, though, because newer bonds featuring higher interest rates will be favored over older bonds with lower rates, thus causing their value to fall.

At times when the economy is sputtering, the Fed may move to lower interest rates to give the economy a boost, helping stocks while pushing the prices of existing bonds lower. Still, there are no guarantees; sometimes, bonds, too, will gain or lose value along with stocks.

Thus, while a 60-40 portfolio split can be perfect at some times, it won't be perfect for all -- and it's not really possible to know ahead of time what the stock market or bond market will do. In the current environment, with interest rates very low and starting to rise, bonds are still not offering much income.

Overlapping pieces of paper, each of which sports a red graph line and words such as stocks bonds mutual funds retirement and so on.

Image source: Getty Images.

It's not a one-size-fits-all formula

Here's another problem with the 60-40 split: It doesn't make equal sense for every investor. If you're very risk averse, you may not do well having 60% of your portfolio in the stock market, which tends to be quite volatile. On the other hand, if you're very young, it can make good sense to have most, if not all, of your long-term dollars in stocks, as you'll have plenty of time to ride out market downturns and enjoy the subsequent recoveries.

If you expect to have sufficient income in retirement from Social Security and perhaps a pension, too, having much of your money in stocks shouldn't keep you up at night. On the other hand, if you can't afford to lose much value in your portfolio, bonds kept to maturity should hold their value and deliver their promised income. (Note, though, that not all bonds are created equal. Low-interest-rate government bonds are safest, corporate bonds are less safe, and junk bonds, offered by companies on shaky ground, sport the highest interest rates because the risk of defaulting is not insignificant.)

What to do

A 60-40 split between stocks and bonds may be perfect for you, but there's a good chance it isn't. Remember that it has been recommended for many decades, including times when interest rates were in the double digits.

Give careful thought to your particular situation, and consider whether you'd be best off with a 60-40 split or perhaps a 70-30, 80-20, or even a 50-50 one. You might also look into target-date mutual funds, which distribute your investment into stocks and bonds -- and importantly, change the allocation over the years. If you aim to retire around the year 2040, for instance, you'd buy a 2040 target-date fund and it would decrease its stock allocation over time.

The Fidelity Freedom 2040 fund, for example, is about 88.1% in stocks and 5.5% in bonds, while the Fidelity Freedom 2020 fund, for those retiring soon, is 57.4% in stocks and 28.6% in bonds. Target-date funds aren't perfect, though. They sometimes charge high fees and all have different allocation formulas, so if you're interested in using one, choose carefully.

If you're diligently saving for retirement, that's excellent -- just be sure your asset-allocation mix is likely to serve you well. You don't want to end up with less than you expected when retirement comes.