Investors may want to rethink how they are structuring their 60/40 portfolios. The role of a traditional allocation of 60% stocks and 40% bonds has been the subject of debate in recent years, particularly after its dismal performance in 2022 when stocks and bonds saw their prices decline in tandem. While some still call the 60/40 a good place to start, others advocate for adding in more portfolio diversifiers . The "total portfolio approach," or TPA, doesn't abandon the framework of the 60/40, but instead buckets the assets by risk, explained Jason Kephart, senior principal of multi-asset manager research for Morningstar. It's an approach that was adopted by the California Public Employees' Retirement System in November, when it became the first United States pension fund to do so. The idea is that investors know exactly what they expect from their assets, Kephart said. "Start thinking about really what the goal of using the exact asset classes in a portfolio is — is something there to help you grow your assets, something there to help you protect your assets, something there for inflation protection?" he said. "It's the same tools you'd use to build a portfolio, but just coming at it from a different lens." While "total portfolio approach" portfolios built by large institutional asset owners can be complex, investors can take a simplified approach by separating investments into two sleeves: growth and stability, Kephart said. How it works This approach isn't necessarily about boosting returns. Instead, it is for those who want to find a "Goldilocks" zone between returns and risk. The growth sleeve holds stocks, but it can also be a place for high-yield bonds and private credit — which would normally fall under the fixed-income bucket. That's because the growth sleeve holds assets that have risk and whose returns are closely linked to economic growth. "When you take on real credit risk, you're introducing more economic risk," Kephart said. The stocks are also affected by this economic risk. The stability sleeve does as its name suggests — provides a cushion when growth assets tumble. Holdings on the stability side of the portfolio could include short-term bonds, investment-grade corporates and short-term Treasury Inflation-Protected Securities, Kephart suggested. It can also be a place to park conservative, dividend growth stocks, he said. These can also be split between the growth and stability sleeves, he noted. Helps investors stay invested A behavior of a portfolio that uses this approach is more predictable, which makes it easier for investors to stay invested through rough times, he said. "The real risk investors run into with 60/40 — when they're not thinking about what the role of the portfolio is — is you end up with potentially riskier portfolios than you signed up for," Kephart said. "That means you're probably not going to be able to stick with it through bad times." "The more you understand when you get into something why you're doing it, the easier it's going to be to stick with over time," he added. Investors should be aware that the "total portfolio approach" is predicated on assumptions about how investments behave, Kephart noted. Therefore they should be mindful about expectations for the assets moving forward. "What holds up better in drawdowns changes over time ... so you can't just rely on past performance," he said.
