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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.