The 60/40 Portfolio Is Obsolete. Here's My Replacement
For forty years, the financial establishment told a comfortable bedtime story called the 60/40 portfolio. It was sold as a law of nature that would keep you safe.
Then came 2022. The very thing that was supposed to be the parachute failed to open.
The "safe" 60/40 got taken to the woodshed; it fell -17% for the calendar year, with a gut-wrenching -21.6% intra-year drawdown. A complete system failure. The core premise—that bonds would zig when stocks zagged—was proven to be a fiction, because they fell together, and they fell hard.
My goal in this piece isn't to be provocative for its own sake.
My goal is to force a clear-eyed look at the data and adapt.
I look at my money as an engineer, and an engineer doesn't stick with a flawed design out of nostalgia. They diagnose the failure, understand the new operating environment, and build a better machine.
Therefore, I wrote this piece as an engineering manual.
We are going to walk through the construction of a replacement portfolio — a system that, over the past three years of real-world stress tests, not only delivered superior returns with significantly less risk, but generated nearly 70% more monthly income for its owner.
The End of an Era, Not Just a Bad Year
The 60/40 portfolio wasn't always a bad idea.
It was a product of a specific economic environment: a 40-year secular decline in interest rates. From the early 1980s until recently, every time the economy wobbled, the Federal Reserve cut rates. This pushed the price of existing bonds up, providing the portfolio cushion everyone came to expect.
That era is over.
We are now in a new regime, one that looks a lot more like the 1970s than the 1990s. The 1970s stagflation—high inflation with low growth—was another period where stocks and bonds got crushed simultaneously.
Data shows that from 1970 to 1999, the average correlation between stocks and bonds was positive. They moved together. The reliably negative correlation we came to depend on was a feature of the 2000-2021 period, not a permanent law of physics.
But 2022 was not an anomaly; it was a reversion.
Relying on that negative correlation today is like using a company's 2019 financial statements to make an investment decision now.
The world has fundamentally changed.
Deconstructing the New Machine
Our goal is not to find a "better" set of assets — It's to build a better machine.
We need a portfolio that generates reliable, high-yield income while managing risk in this new environment.
We can do this by replacing the fragile, low-output bond allocation with two specialized components. We keep 40% in SPY for the core growth engine and re-engineer the rest.
Part 1: The Foundation — The New "Safe" Money (40% Allocation)
The fatal flaw of a traditional bond fund like AGG was its sensitivity to interest rate changes, known as duration risk.
Our new foundation must be the opposite: extremely stable, liquid, and yet provide a respectable yield.
The tool for this job is the iShares 0-3 Month Treasury Bond ETF (SGOV).
As of July 2025, SGOV has a 30-day SEC yield of 4.22%.
Its 3-year standard deviation is just 0.30%.
That's about as close to zero volatility as you can get in a traded asset. Yet, it's a productive, working asset.
**Crucial Tax Advantage: The income from SGOV is derived from U.S. Treasury bills, making it exempt from state and local income taxes. For those of you in high-tax states like California or New York, this is a significant, often overlooked, boost to your after-tax return.
Part 2: The Engine — Under the Hood of JEPI (20% Allocation)
This is where the engineering gets interesting.
The JPMorgan Equity Premium Income ETF (JEPI) is our income engine, and it's a two-part system.
The Stock Portfolio: JEPI holds a basket of 100-130 large-cap, lower-volatility U.S. stocks. Think of mature, stable companies. This part is designed to be a smoother ride than the S&P 500 itself.
The Options Strategy (via ELNs): This is the income generator. JEPI uses Equity-Linked Notes (ELNs) to synthetically sell covered calls on the more volatile S&P 500 index. It’s a way to harvest higher options premiums (which represent the market's appetite for short-term bets) while holding a more defensive set of stocks.
We are taking the other side of that bet, systematically collecting cash in exchange for capping some of the portfolio's potential upside.
Can the dividend be cut?
Absolutely.
And it should fluctuate. JEPI's yield, currently a trailing 8.34%, is a direct function of market volatility. High volatility means high options premiums and a larger distribution. Low volatility means lower premiums and a smaller distribution.
This is a feature, not a bug.
From a Blueprint to Your Personal Dashboard
The 40% SPY / 40% SGOV / 20% JEPI allocation is our baseline model.
But you're not a baseline. Let's adjust the dials.
The "Fortress" Dial (Conservative / Deep Retirement)
For those who prioritize capital preservation and consistent income above all.
Allocation: 30% SPY / 50% SGOV / 20% JEPI
Logic: We dial down the growth engine (SPY) and increase the stable foundation (SGOV). Total return will be lower, but the income stream becomes an even larger, more reliable portion of the return, and volatility shrinks further. This is for sleeping soundly.
The "Accumulator" Dial (Growth-Oriented / Pre-Retirement)
For those still working or with a higher risk tolerance.
Allocation: 50% SPY / 30% SGOV / 20% JEPI
Logic: We increase exposure to the growth engine (SPY). This will increase volatility and potential upside, making it behave more like a traditional growth portfolio but with a significant income component and a safer ballast than bonds.
The Head-to-Head Comparison:
What follows is a verdict on two competing philosophies: the one of passive hope vs the one of active engineering.
The last three years, encompassing a brutal bear market (2022) and a strong recovery (2023-2024), provided a perfect real-world stress test.
What These Numbers Mean:
Resilience is Everything: A -20.8% drawdown is not just a statistic — it's a year of sleepless nights and questioning your entire plan. A -11.5% drawdown is a correction. The Multiplier's ability to slash the worst-case scenario while giving up very little upside is its most critical feature. It achieves its returns with nearly 24% less volatility. This is how you defend against Sequence of Returns Risk.
The Professional's View on Efficiency: The Sharpe Ratio measures return against all volatility. A ratio of 0.13 is an indictment. It means the 60/40 subjected you to immense risk for a reward barely better than stuffing cash under a mattress. The Sortino Ratio is even more important, as it measures return against only the harmful, downside volatility.
The Multiplier's Sortino of 0.56 is nearly 3 times better than the 60/40's 0.19. This is quantifiable proof that it is a vastly smarter and safer portfolio for someone whose primary goal is capital preservation.
The Pre-Mortem: How This Machine Could Break
A good engineer stress-tests their own design. Let's talk about how this could blow up.
The JEPI 'Black Box' Risk: The notes in JEPI introduce counterparty risk. If one of the issuing banks has a Lehman-style collapse, a portion of the fund's assets could be impaired. The risk is remote, but it is not zero.
The Volatility Collapse: JEPI's yield is a payment for volatility. If we enter a prolonged period of market calm, like 2017, options premiums would dry up and JEPI's yield could fall to the 4-5% range. Your paycheck from JEPI would shrink. This is a feature of the strategy, not a bug.
The Tax Dragon: JEPI's income is tax-inefficient. A future administration could raise taxes on investment income, reducing its after-tax effectiveness. This is a political risk outside our control.
The Playbook — From Theory to Your Bank Account
A blueprint is useless without assembly instructions.
Pro-Tip: Tax Location is Not Optional
Beginners think about what to buy. Professionals think about where to hold it.
Taxable Account: This is the best place for SPY (for long-term capital gains rates) and SGOV (for its state tax exemption).
Tax-Deferred Account (IRA/401k): This is the ideal home for JEPI. Sheltering its tax-inefficient income inside an IRA allows it to compound without an annual tax drag.
Case Study: Transitioning a $2 Million Portfolio
Let's imagine "Bob," 65, retired, with a $2M portfolio (60/40) split between IRA (800k) and a taxable acc ($1.2M).
Step 1: The Quick Win (IRA):
Inside his tax-free IRA, Bob immediately sells his AGG and a slice of SPY.
He uses the cash to buy 320,000 of SGOV and 160,000 of JEPI. In one day, 40% of his total portfolio is re-engineered with zero tax impact.
Step 2: The Tax-Loss Harvest (Taxable)
In his taxable account, Bob sells his AGG position at a $20,000 loss. He "harvests" this loss to use against future gains. He parks the cash proceeds in SGOV, where it immediately starts earning a stable yield.
Step 3: The Strategic SPY Transition.
Bob cannot sell all his appreciated SPY at once.
He'll do it over 2-3 years, selling chunks, using his harvested loss to offset initial gains, and paying a manageable amount of tax each year until he reaches his final 40/40/20 target.
The New Monthly Paycheck: A Ledger Comparison
A retiree lives on cash flow. Let's compare Bob's old $2M portfolio versus his new one:
Old 60/40 Paycheck Ledger ($2,000,000)
Total Annual Income: ~$45,200
Average Pre-Tax Income: ~$3,770 / month (and it's lumpy)
New Multiplier Paycheck Ledger ($2,000,000)
Total Annual Income: ~$76,240
Average Pre-Tax Income: ~$6,350 / month (and it's almost all monthly)
The Shift: Bob's monthly pre-tax cash flow sees a nearly 70% increase. This is a game-changer. The portfolio stops being a volatile number and starts behaving like a private pension fund.
A System for Long-Term Resilience
Rebalancing: Use bands, not a calendar. If any holding drifts more than 5% from its target (e.g., SPY hits 45%), rebalance.
Cash Flow: Direct all monthly distributions from SGOV and JEPI into your bank account. This is your paycheck.
Maintenance: At year-end, use any excess cash to buy whichever asset is underweight. This lets you rebalance without selling, avoiding taxes where possible.
The world has changed.
The work we did today was not about picking three hot ETFs. It was about a fundamental shift in philosophy. We moved from a portfolio based on hope—the hope for a specific market correlation—to a portfolio based on engineering. We defined our needs: durable income and capital preservation. We then selected specific tools, each with a clear purpose, to meet those needs.
We analyzed the system's performance, stress-tested its weaknesses, and laid out a precise, tax-aware plan for implementation.
And this is how you convert market chaos into a reliable paycheck.
As always, thank you for tuning in and for supporting this project!
Mike Thornton, Ph.D.
Are you literally suggesting a portfolio have three holdings? How does this strategy fit or compete with your options strategy that you mostly write about?