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I have been reading in some of the comments on the Forum recently that some of you use a total portfolio approach for your investments. I tried to look it up in Jonathan’s guide but couldn’t find it. I don’t know what this is and was hoping some of you might be able to explain it in a way I could understand. I am not sure if this is something I need to research more? I tried to look it up on Mother Google but didn’t understand what the AI said it was. I am guessing this is something different than having your investments in pre-tax, Roth and brokerage accounts? Thank you, friends, you are always gracious to teach. Chris
Today, with traditional Strategic Asset Allocation (SAA), I might decide on 60% stocks, 30% bonds and 10% real estate, and periodically rebalance back to those allocations. I can break down stocks into US, international, emerging markets and so on. This is what we are used to.
Total Portfolio Approach (TPA) turns the question around: the process is to ask what job each invested dollar needs to do. Maybe 60% of my money needs to provide growth, 30% needs to provide stability and 10% needs to protect against inflation. I then look for the best investments to do those jobs.
Growth might come from U.S. stocks, international stocks or private equity. Maybe even debt with interest rates at 5%! Stability might come from bonds, cash, gold or managed futures. Inflation protection might come from TIPS, commodities or real estate.
So SAA starts with “what asset classes should I own and in what percentages?” TPA starts with “what does my portfolio need to accomplish, and what investments can best accomplish it?”
From what I read, the distinction is more important to large financial institutions like pension funds where departments are organized around SAA today.
I think there is such a mix of perspectives within these comments that it’s still hard to distill a simple “total return” meaning. When people use the term “total return” it’s usually directly compared to a dividend-focused investment strategy, which is probably why you’ve seen it come up recently.
A total return approach means you fund spending from the portfolio’s overall return—interest, dividends, and capital gains—rather than trying to live only off income distributions. You invest for the best risk/return mix instead of emphasizing high-dividend or high-yield investments just to generate cash. When you need money, you can use dividends and interest plus sell some appreciated investments. This lets your asset allocation be driven by your financial goals rather than by how much income each holding produces.
Exactly
Chris:
This is how I understand and structure my portfolio per a total return portfolio approach.
First I have my allocation: 45% equities (30% total US, 15% total international), 45% bonds, 10% cash (money market fund).
Second I have my asset location: most of the equity position is in our Roths (because these funds will increase in value fastest, will be tapped last, or hopefully inherited in their entirety). Bonds are mostly in my traditional IRA because these will have the lowest returns, will be subject to RMDs, and will cover our expenses in excess of Social Security income.
Third with a total return portfolio it doesn’t matter if my increase in portfolio value is due to increase in equity prices, dividends, or interest. Basically it’s all money.
Fourth when income is needed it comes from rebalancing to our allocation. I have my equity positions in my traditional IRA as domestic and world. I have my bonds in short term, short term TIPS, and total bond (I try to keep each at 1/3). Whatever exceeds our asset allocation gets trimmed back to baseline. Again it doesn’t matter if not matter if it equities or bonds that are out of balance they get trimmed quarterly as at this point all of our income is from my traditional IRA (as we are retired and waiting to claim SS at 70). This is to decrease my RMDs when I turn 73.
I think my plan is solid, but I would welcome any critique of my plan.
PS I just read one potential flaw in written one of Adam Grossman’s Daily Ideas (I highly recommend reading). He states that the older person of a couple should convert Roths first to decrease the size of the couple’s RMDs. I am converting all of my wife’s (she is basically one year younger, which I don’t think is significant). The reason is to convert all of her smaller traditional account first to eliminate her having to take any RMDs at all. As Thoreau once wrote, “Simplicity, Simplicity, Simplicity.”
I agree that’s a good reason to deviate from the math.
Chris, I like Dr. Jim Dahle’s (The White Coat Investor) thinking summarized in his 2024 article statement titled “The 15 Questions You Need to Answer to Build Your Investment Portfolio” wherein he wrote “What you don’t realize is that nobody else knows the right answers either.
As others have already commented the key to me seems to be to find an appropriate portfolio that works for you and to stick with it until your own life circumstances creates a need for change and not make changes based on the gyrations of the financial markets.
I hope this helps.
Best, Bill
Your second paragraph says it all. The best plan for an individual is the one which is sensible and which he or she can stick with for the long term.
Thank you, Bill. I read Dr Dahle, but a lot of his writings don’t fit our situation I will check this one out. Chris
Love Jim. However, ““What you don’t realize is that nobody else knows the right answers either”, suggests a “see no evil, hear no evil, speak no evil” approach. While THE right answer may be unknowable, some answers are more right than others.
I think this is quite understandable, from ChatGPT ;
In retirement planning, a “total portfolio approach” means you stop thinking of each investment account or asset as having to serve a separate purpose—“this bond fund generates my spending money,” “these stocks are for growth,” “I’ll live off dividends,” etc.—and instead treat all of your investments as one integrated portfolio designed to support your spending needs.
The key idea is total return:
Total return = interest + dividends + capital appreciation
Suppose you have a 1 million portfolio and decide that 40 K is an appropriate annual withdrawal. Under a total-portfolio approach, you don’t insist that the portfolio generate 40 K of dividends and interest. If it produces $25 K of interest/dividends, you can obtain the remaining 15 K by selling investments. Economically, the combination is what matters.
This connects directly to our recent discussion about bond interest versus stock dividends. A total-portfolio approach deliberately avoids giving dividends a special status. A $50,000 dividend isn’t inherently preferable to selling $50,000 of appreciated stock. In fact, selling shares can sometimes be more tax-efficient, because only the gain embedded in the shares sold is potentially taxable, whereas taxable interest is generally ordinary income.
It also means you can design the portfolio around the characteristics you actually want—perhaps stocks for long-term growth and inflation protection, bonds for stability and spending needs—rather than choosing investments simply because they produce income.
For your retirement-spending question, this distinction is particularly important. When estimating how much you can sustainably spend, I would use a total-portfolio framework: Social Security and other outside income + withdrawals from the entire investment portfolio, while taking taxes and account type into account. I would not limit your spending to dividends and interest.
And there’s one subtle but important point: “total portfolio approach” can also refer to asset allocation across all accounts collectively. For example, you don’t necessarily need every IRA, taxable account, and 457 to each be 60/40. One account could hold mostly bonds and another mostly stocks, while the combined household portfolio has the desired allocation.
Thank you, Mark, I could understand this. It is an interesting way to think about things. It makes sense that taxes are part of the total return planning. And, that you don’t necessarily have each kind of investment in each account, you put them where it makes sense. Like, our Roth account has more stock b/c we want it to grow and maybe tap later. Chris
It seems I follow the total portfolio approach without even hearing of it before. I log into Fidelity and the total value of my investments pops up. That is what makes me happy or depressed. Then I can see the total broken down by IRA and brokerage investments. Each of those has a mix of mutual funds, and bond funds.
The one total number is what matters. At the end of each month I also look at the “Activities” tab where I can see the interest payments from bond funds and MM accounts. Four times a year I see the dividends. Just curious.
Now to be honest, if those funds were relied on for retirement income, I’m not sure what I would do. I know one thing, I’d be in a regular state of stress.
Our retirement income is composed exclusively of SSA benefits and withdrawals from our investment accounts. We have listened to Buffett, Jonathan, Bogle, Bernstein and many others, and adapted some of their ideas to suit our goals and personalities. The whole point was not to maximize financial wealth, but rather minimize the risks of running out of money. So no stress, at least in regards to this matter.
Dick, I would not say you follow the total portfolio approach. For example:
You are far from agnostic about where your cash flow comes from. You love your stock dividends and the payments from your municipal bond holdings.
As I recall, you have different accounts for different purposes. I don’t mean taxable/traditional/Roth, but more vacation, next car, kids’ weddings, etc (just examples, I don’t recall the specific ones you’ve mentioned).
I respond not to criticize your approach, but rather to take the opportunity to further illustrate for the OP and others what a total portfolio approach means.
Those accounts are bank accounts unrelated to investments. I was just thinking of our brokerage and IRA.
That is not a total portfolio approach. Your total portfolio includes everything like real estate you don’t live in, pensions, SS – all sources of income and assets you can liquidate.
if that is the case, i guess not
Michael, we have different accounts for different purposes all in our money market. I think of it more as sinking funds, along with our emergency fund. Chris
Chris, I don’t mean to overstate the “different accounts for different purposes” point. Sorry if that created any confusion.
The most important aspect of what makes an investing approach “total portfolio” in my view is that it’s agnostic about where cash flow comes from. One might view it as the opposite of an income focused approach. Income focused investors are often loathe to sell assets or “spend capital”.
For example, in the latter, I’d be trying to satisfy my spending needs by selecting investments that provide income streams through direct distributions, usually including stock dividends and bond income, whether from individual stock and bond holdings or funds.
Whereas, in a total portfolio approach, one is investing for total return, achieved through a combination of distributions and capital appreciation. The total portfolio investor doesn’t care whether cash flow comes through distributions directly, or if it’s created by selling assets. If enough cash is generated from direct distributions, fine. If not, they sell something, also fine.
That’s the essence of what a total
portfolio approach is. Asset allocation, location, account structure, tax management, etc are all things that can be considered (or not) in either an income focused or a total return approach.
I saw the question hours ago and was just coming back to respond. I think this response sums it up pretty well.
Hi Chris.
Are you referring to what the great Jack Bogle of Vanguard preached which then got popularized by his ardent fan Taylor Larimore (blessed at age 102 now)?
Three-Fund Portfolio
I have been accidentally using it since Mar/1997 and it has worked very well so far which I can humbly state now at my age 62.
If this is not the one you were thinking of, it is still a useful topic to study as it is frequently discussed in the Bogleheads online forum. Jonathan Clements also wrote in favor of it in many of his articles.
https://www.bogleheads.org/wiki/Three-fund_portfolio
All the very best.
Hi Chris. It has to do with your asset allocation. A total portfolio approach applies a holistic asset allocation across all your investments. Say you choose a 60/40 asset allocation, each individual account might not be strictly 60/40, but the overall result when accounting for all accounts would be 60/40. For example, you might hold more bonds in your tax deferred accounts and your brokerage account might be more heavily invested in an index fund or other tax efficient investments, but when considered together, they still result in a 60/40 allocation. That’s a total portfolio approach.
Thank you, D.J.,this was helpful. Chris
I looked the question up using Gemini and it gave a very good explanation and a side by side comparison of other approaches. Noted it’s used mostly by institutional investors.
Yes, I see that it’s mostly used by institutional investors.
Dan and Dick, It’s a matter of context. It certainly does apply to institutional investors, but retail investors can use a total portfolio approach as well. We tend to refer to it as “asset location.” It is not solely an institutional approach; retail investors use it every day to maximize tax efficiency.
.
Absolutely. We take a total portfolio approach.
In fact, as I recall there’s plenty on Morningstar, which is for individual investors, about using a total portfolio approach.
(It’s not the same as asset location. One can practice asset location without having a total portfolio approach, and vice versa.)
Thank you, Michael, I will look there.
Chris, that’s a great question, and one that this dumb investor has no readily available answer. Following your lead, I also turned to AI for some clarification. I still can’t explain it clearly, but my impression is that it’s a term invented by active managers trying to get us to pay them old fashioned management fees by promising market-beating mutual funds.
Please, someone correct me if I’m wrong.
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