40/40/20 Rule: A Simple Way to Balance Your Portfolio

Ever feel lost when trying to split your money between stocks, bonds, and cash? The 40/40/20 rule gives you a quick, no‑brain‑teaser formula. It says: put 40% of your investable assets in equities, another 40% in fixed‑income, and keep the remaining 20% as cash or short‑term savings. Simple numbers, clear purpose, and it works for many investors who want a balanced mix without spending hours on calculations.

How the 40/40/20 Rule Works

Think of your portfolio like a plate. The 40% of stocks give you growth potential – those are the dishes that can get bigger over time, but they come with more risk. The other 40% goes into bonds or other fixed‑income products, which act like the veggies that keep things stable and provide regular income. The final 20% sits in cash, money‑market funds, or short‑term CDs, ready for emergencies or new opportunities.

Why split it this way? History shows that a mix of growth and safety smooths out the ups and downs of the market. When stocks dip, bonds usually hold steady, and cash protects you from having to sell at a loss. If the market is booming, the stock portion lets you ride the wave. This rule also keeps you from over‑exposing yourself to any single asset class.

Putting the Rule Into Practice

Start by figuring out your total investable amount – that’s the money you could realistically put into the market without needing it for day‑to‑day expenses. Say you have £20,000. Under the 40/40/20 rule, you’d allocate £8,000 to stocks, £8,000 to bonds, and keep £4,000 in cash.

Choose low‑cost index funds or ETFs for the stock and bond pieces. For example, a broad FTSE 100 or MSCI World fund can cover the equity part, while a UK government bond fund can handle the fixed‑income side. Keep the cash in a high‑interest savings account or a money‑market fund so it earns something while staying liquid.

Rebalance once a year. If stocks performed great and now make up 45% of your portfolio, sell a bit and move the proceeds to bonds or cash to get back to the 40/40/20 split. Rebalancing locks in gains and maintains your risk level without you having to guess.

Adjust the rule as life changes. If you’re nearing retirement, you might shift more towards bonds and cash, maybe 30/50/20 or even 20/60/20. The key is to keep the principle of diversification – you always want a mix that matches your risk tolerance and goals.

Finally, keep it easy. The whole point of the 40/40/20 rule is to remove analysis paralysis. You don’t need a finance degree to follow it; you just need to be consistent and review it occasionally. Give it a try, and you’ll likely feel more confident about where your money is going.