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The Adaptive 60/40 Portfolio Thumbnail

The Adaptive 60/40 Portfolio

The 60/40 portfolio has been the go-to allocation for advisors and investors for decades, ever since modern portfolio theory outlined the benefits. In today’s markets, with correlations rising, yields falling and volatility increasing – 60% stocks and 40% Treasuries/Governments/Corporates may not be the best option for some investors, depending on their income needs. 

A possible solution – an adaptive portfolio that mixes up the allocation but can keep your preferred risk profile intact.  How does that work? By incorporating additional strategies and products, in amounts that make sense for each investor’s goals, and pairing them with lower risk allocations. For instance, structured products, annuities, good old cash. 

The goal is to create a sustainable withdrawal rate throughout your retirement. For some investors, deploying a bigger spectrum of strategies and structures can lower volatility and help to provide you with the retirement you’ve worked for. 

Creating a Portfolio That Works for You: Risk Tolerance

The asset allocation is the core of the portfolio we create for you. But before we can begin to think about specific investments, we assess your risk tolerance. Everyone is different, but there is a right answer that is true across every portfolio we create. The right risk allocation is the one that allows you to stay invested without worry, no matter what is going on in the markets. The key to long-term performance is to remain invested, and our job is to create a portfolio that works for you no matter what. 

An Academic Foundation

Deploying a portfolio with the potential to generate consistent returns is the foundation of income sustainability. We set out to keep standard deviation  - the statistical measure of how spread out a portfolio’s returns are from its average return - as low as possible.  Portfolios with low standard deviations generally exhibit consistent long term returns. 

Your Time Horizon Guides Your Asset Allocation

Your needs in retirement usually reflect your plans over a period of time. That’s why it’s important to invest with that in mind. For example, you may have short-term needs for liquidity of say, 1-3 years. To meet these needs, we would invest a portion of your assets differently than we would for longer term income goals. A potential asset mix in the short-term portion of your portfolio could be a combination of cash, short-term bonds and principal protected assets such as annuities. This provides you with a source of ready capital for both expected and unexpected expenses. We generally stay away from equity investments  within the short-term asset mix, because we don’t ever want to have to liquidate them in a down market. 

Flexibility is Critical - Across Assets and Instruments

We keep flexibility in mind across your entire portfolio because we know your plans - and your income needs - will change with time. But we go further than that. The instruments you are invested in must be carefully selected to ensure that changes can be made easily and efficiently. For instance, investments that don’t allow redemptions such as private placements, or that carry surrender charges or redemption fees as some annuities and mutual funds do, could create constraints on the portfolio. 

A Sample Asset Mix

Shifting the asset allocation of the bond portion of the 60/40 portfolio so that it may include up to 20% bonds and as well as up to 20% bond alternatives may potentially add value. 

 While the 60% equity allocation remains the same, the bond portion may be shaded differently to include assets that can potentially increase yield and protect against some downside risk. These may include principal protected assets, or structured notes or annuities that have a buffering element.  The goal is to attempt to decrease portfolio drawdown, lower the standard deviation, and potentially increase return. 

 Because we are creating a bond allocation that can potentially increase return and lower risk, essentially what we are doing is making some space to take additional risk in the equity portfolio - perhaps by adding more higher volatility growth stocks.  It’s the same 60/40 portfolio -- but with a bit of a twist. 

This is just one example of a flexible approach to crafting a portfolio that can potentially meet the income needs while still abiding by a given risk tolerance. 

The Bottom Line

Expanding your portfolio beyond the traditional allocation can help lower volatility even through market downturns and keep you on track with the income you need in retirement. It requires a sophisticated knowledge of products and strategies – but the result should be simple, transparent and easily tracked. 

We’ve distilled our experience into a specialized expertise in creating flexible, custom allocations for our clients. And because we are completely independent, we have no constraints on implementation and can select the right products for our clients’ needs. 


Paul Tarins is an investment adviser representative of and offers investment and advisory services through Portfolio Medics, a registered investment adviser. Nothing contained herein should be construed as a solicitation for investment advisory services. Sovereign Retirement Solutions and Portfolio Medics are not affiliated.