The World is Evolving. So Too Must Portfolio Construction.

Rethinking Portfolio Construction: Why 40/30/30 is the Key to Balance

Since 1950, the investment portfolio has remained largely unchanged. In that time, the phone has evolved dozens of times. The light bulb has been reimagined. The car, electrified. AI is revolutionizing entire industries. Yet, portfolios still follow the same blueprint—rigidly anchored to a 60/40 split between stocks and bonds, a structure built for a bygone era.

Why are we still investing like it’s 1950?

The investment industry has long been shackled to the idea that diversification means balancing stocks and bonds—a rigid 60/40 framework that worked spectacularly well in a world of low inflation and declining interest rates. But as the past few years have made painfully clear, that world may no longer exist.

It’s not so much about predicting the next shift—it’s more about being prepared and building resilient portfolios designed to navigate it. Inflation is no longer a blip—it's a structural force. Market volatility isn't an anomaly—it's the new normal. In spite of that, far too many portfolios remain decidedly trapped in a 60/40 framework that may no longer work.

Advisors who fail to adapt could be falling behind.

”A lot of the themes that we saw in 2022 in terms of equity markets trading at extremes, credit markets trading at tight spreads, and rates pricing in a bunch of rate cuts—2025 really seems to start off that way as well,” observes Pawan Vatvani, Director in Picton Mahoney’s Portfolio Construction Consultation Team, in a recent conversation.1

The same patterns are re-emerging. The same risks are resurfacing. But the difference now? Advisors know what’s coming—and they have the tools to prepare.

The 60/40 Portfolio is Outdated

"A lot of people, when I talk to advisors, think that 2022 was a one-off. I think that’s more of a reality that investors and their advisors are trained to think about building portfolios with two major asset classes—stocks and bonds,” says Mike White, Portfolio Manager at Picton Mahoney Asset Management. “And when you’re painting with two colors, you know, it really creates an issue wherein the problems are fraying within those respective asset classes, and, therefore, the solutions are always confined to being within those two asset classes."

The old blueprint isn’t just outdated—it’s actively exposing investors to greater risk.

The 40/30/30 Framework: A Smarter Way Forward

So where do we go from here? The answer is clear: 40/30/30.

”When we think of portfolios, it’s not in terms of 60/40, but [instead] we move towards this model that’s more like 40/30/30,” explains Neil Simons, Portfolio Manager. “So 40% is the equity piece, 30 is the fixed income piece, and then the other 30% is the alternates piece. And so that gives, alluding to Mike’s painting-with-two-colors analogy, that gives a much larger palette for investors to work with."

This broader palette is what makes 40/30/30 so powerful. The 30% allocation to alternatives is not a single, monolithic block—it is carefully structured into:

1. Enhancers – “Taking the traditional risks, but maybe in a slightly smarter and different format.”
2. Diversifiers – “Return streams that are independent of market direction.”
3. Inflation Protectors – “Dedicated inflation protection that will protect them in environments like the 2022 scenario that Mike alluded to earlier.”

This intentional structure ensures portfolios are better positioned for volatility, uncertainty, and inflationary surprises.

Inflation is a Regime, Not an Event

One of the biggest blind spots in traditional portfolios? Underestimating inflation’s persistence.

"Inflation comes about every once in a while. And when inflation causes rates to rise, the correlation between stocks and bonds increases,” cautions White. “Our research shows that, levels above 3%, that stock-bond correlation looks positive. So the benefits of ballast between the two asset classes kind of diminish, if not completely go away."

”What a lot of people believe is that inflation is episodic, and there are times where it has been historically, but it can also be a regime,” adds Simons. And for that reason, we know that it’s very hard to predict both in terms of timing, degree, and stickiness."

What does this mean for portfolio construction?

It means that strategic inflation protection—not just reactive positioning—is critical.

As Simons put it, ”We think investors should have dedicated inflation protection in their portfolios, and that will protect them in environments like the 2022 scenario that Mike alluded to earlier."

Picton Mahoney believes it’s necessary to take a proactive approach, shifting their inflation protection sleeve to reflect stickier services inflation rather than just goods inflation.

"Traditionally, people believe that commodities provide good protection in inflationary episodes, and that’s true. And we do have commodities as a core component of the Inflation Opportunities portfolio,” elaborates Simons. “But we also have some other portfolio allocations that should benefit if the services part of inflation picks up without the corresponding goods part. And that’s mostly in the fixed income area, so we have duration-hedged exposure to inflation-linked bonds, as well as a dedicated short position in government bonds."

The takeaway? Inflation protection is not just about hard assets anymore.

Tactical Adjustments: Moving Beyond Static Allocations

Strategic shifts are important—but in today’s environment, tactical positioning is just as critical.

Simons details some of the adjustments Picton Mahoney has made:

"At the moment, equity valuations are very high, and credit spreads are being priced for perfection. As well, the traditional fixed-income component is no longer offering much diversification because inflation is creeping up. So in that environment, we’ve made a few tactical adjustments within our multi-asset, multi-strategy portfolios."

The adjustments include:

• Underweighting corporate credit – “We don’t see a great risk-return tradeoff there.”
• Underweighting government bonds – “If you’re not getting the correlation benefit, it doesn’t make much sense to overweight that.”
• Adjusting hedging strategies – “We were adding optionality to capture upside in Q4 2024. Now we’ve turned that around—our tactical hedges are positioned to profit from any downside in equity markets.”

Tactical flexibility isn’t about taking wild bets—it’s about smart, precise risk management.

"A lot of advisors think tactical means shifting chips around aggressive. But it’s really about smart hedging at the margin,” White emphasizes. “That’s where the expertise at Picton Mahoney comes in—most investors and advisors don’t have the time, budget, or capability to implement these adjustments effectively."

How Advisors Can Make the Transition to 40/30/30 Framework

Many advisors recognize the need for change—but don’t know where to start.

"You cannot move the dial with a dabble, and a couple percent is really not going to affect a portfolio outcome by and large,” says White. “So maybe the first step would be to begin with between 5-10% of an allocation to alts. Then as we get toward that aspirational goal of 30, you could split that allocation maybe two-thirds, one-third toward, the alpha or pure diversifier and inflation respectively."

The bottom line? Advisors who act now will still be early movers.

Final Thought: The Cost of Doing Nothing

The decision to keep doing things according to the old blueprint is not a neutral decision—it is a decision to accept more risk, greater volatility, and weaker outcomes.

White sums it up: "For those making allocations today—you’re not late. There’s still actually an early mover advantage."

The future of portfolio construction is clear. 40/30/30 isn’t just an option—it’s a way forward, with each step adding more stability, protection, and opportunity. For those who want to lead, the time to act is now.

Footnote:

¹ 40/30/30: The Key to Balance, "The 2025 Picton Report." 15 Feb. 2025, https://gateway.on24.com/wcc/eh/4142978/lp/4855550/403030-the-key-to-balance?partnerref=advisoranalyst.