The traditional 60/40 portfolio, which allocates 60% to stocks and 40% to bonds, has faced scrutiny following its poor performance in 2022 when both asset classes declined simultaneously. Jason Kephart from Morningstar suggests a 'total portfolio approach' (TPA) that retains the 60/40 framework but organizes assets by risk.
This method was recently adopted by the California Public Employees' Retirement System, marking a significant shift in institutional investment strategy. The TPA encourages investors to clarify the purpose of each asset class in their portfolio, whether for growth, protection, or inflation hedging.
Kephart explains that while the growth sleeve may include stocks and high-yield bonds, the stability sleeve focuses on safer investments like short-term bonds and dividend growth stocks. This structure aims to create a more predictable investment behavior, helping investors remain committed during market downturns.
However, Kephart warns that the effectiveness of the TPA relies on accurate assumptions about asset behavior, emphasizing the need for investors to be cautious about their expectations based on historical performance