Return Stacking Strategy: A New Way to Build a More Resilient Retirement Portfolio and Unlock the Benefits of Diversification

What Is Return Stacking?

For decades, the traditional 60/40 portfolio has been one of the most familiar investment structures for retirees. It typically combines 60% stocks for growth and 40% bonds for stability. Over the last 20 years, this type of balanced portfolio has delivered an average annualized return of about 6% for retirees.

Because of that, trying to beat a 60/40 portfolio from a risk-adjusted return standpoint has often been difficult. The bigger challenge is that adding protection to a portfolio has usually required investors to give something up.

That tradeoff is often described as the “diversification tax.”

In simple terms, the diversification tax happens when an investor sells some of their growth assets, such as stocks, to add a protective or diversifying strategy. The goal is to reduce risk during difficult markets, but historically, that decision has often dragged down returns when compared to a simple 60/40 balanced portfolio.

Return stacking is designed to solve that problem.

Instead of replacing part of the portfolio, return stacking adds another strategy on top of the existing portfolio. This allows investors to keep the core assets they already understand and trust, while layering on an additional source of diversification.

Watch a full YouTube explanation here, straight from the Rankin Rice Wealth Management team.

The Problem With Traditional Diversification and Traditional Asset Allocation

In a traditional portfolio, investors have a limited amount of capital to allocate. If the portfolio is already fully invested, adding something new usually means selling something else.

That creates an “either-or” decision.

You can either own the stocks and bonds you already have, or you can sell part of them to add a diversifier. For many investors, this is frustrating. If the diversifier underperforms the asset they sold, they may feel disappointed and want to abandon the strategy altogether.

This is especially difficult for retirees, because they need both growth and protection. They want the portfolio to continue growing, but they also need to reduce the impact of bear markets, inflationary periods, and poor timing around retirement.

Return stacking changes the structure of that decision.

Instead of treating the portfolio as a flat parking lot with limited space, return stacking treats it more like a parking garage. It adds a new layer. This gives the portfolio another dimension, allowing a diversifying strategy to sit on top of the traditional allocation instead of replacing it.

How a 60/40/20 Portfolio Works

A basic 60/40 portfolio is capped at 100% exposure. With return stacking, the portfolio does not necessarily stop there.

For example, a portfolio could keep the original 60% stocks and 40% bonds, then add a 20% diversifying strategy on top. This creates what can be described as a 60/40/20 portfolio.

The goal is not simply to take more risk. The goal is to add a different kind of return stream that behaves differently from the core stock and bond portfolio.

This additional layer can help act as a shock absorber when markets experience sustained downturns. Instead of forcing investors to choose between growth and protection, return stacking is designed to keep growth exposure intact while adding a protective strategy on top.

Is Return Stacking New?

Return stacking may sound new, but the idea itself has been around for decades. It is closely related to the concept of portable alpha, which has long been used in institutional and pension portfolios.

Large institutions and pension plans have used these types of strategies because they are not limited to simple two-dimensional portfolio construction. They look for ways to build more efficient portfolios by combining different sources of return.

The newer shift is that these ideas are becoming easier to package and explain for individual investors and retirees.

Understanding Leverage in Return Stacking

One of the biggest concerns with return stacking is leverage.

For many retirees, the word leverage sounds risky. That concern is understandable, because leverage is often associated with doubling down on a concentrated investment idea. For example, some leveraged products try to multiply exposure to a single market, sector, or company.

Return stacking uses leverage differently.

The key distinction is between concentrated leverage and structural leverage. Concentrated leverage increases exposure to the same bet. Structural leverage is used to add a different and uncorrelated exposure to the portfolio.

A helpful framework is the acronym LICE. Investors should avoid leverage that is:

Illiquid

Concentrated

Excessive

Return stacking is not intended to multiply one concentrated bet. It is intended to add a separate diversifying exposure that can improve the structure of the portfolio.

In that sense, leverage is treated as a tool. When used poorly, it can increase risk. When used thoughtfully, it can help create a more diversified and resilient portfolio.

Why Trend Following Can Be a Powerful Diversifier as an Investor

One strategy often used in an all-terrain investment approach is trend following.

Trend following is part of the managed futures space. It looks for trends across broad asset classes, including:

Energy contracts such as crude oil

Agricultural commodities

Gold and other precious metals

International equities

International bonds

Currencies

These asset classes can respond to different supply and demand dynamics, as well as economic and monetary policy shocks.

That matters because traditional stock and bond portfolios can struggle during certain environments, especially equity bear markets and inflationary periods. Trend following can provide exposure to return sources that are not tied only to the performance of stocks and bonds.

This is why trend following is often described as a natural complement to a traditional stock and bond portfolio. It may help provide portfolio ballast when traditional assets are under pressure.

Return Stacking vs. Stock Picking

Many investors and advisors try to improve returns by picking better stocks, bonds, or fund managers. The challenge is that security selection is extremely difficult.

The transcript explains that 88% of fund managers underperformed the S&P 500 over 15 years. Even with perfect foresight in selecting top-performing large-cap managers, the average excess return may only be around 0.65% over a 20-year period.

Return stacking takes a different approach.

Instead of relying on stock-picking skill or manager selection, it focuses on portfolio structure. The idea is to add a separate return stream on top of the core market exposure.

In the example discussed, stacking hedge fund beta could add 3.22% on top of market beta. It also showed a higher consistency of outperforming the benchmark, with outperformance occurring 69% of the time compared to 58% in the stock-picking example.

For retirees, this structure may be more compelling because it aims to create a smoother return path without depending on luck or perfect investment selection.

How Return Stacking Helps With Sequence of Returns Risk

Sequence of returns risk is one of the biggest concerns for retirees.

This risk happens when a retiree experiences poor market returns early in retirement, just as they begin withdrawing from their portfolio. Even if long-term average returns are reasonable, early losses can have a major impact because withdrawals are happening at the same time.

The transcript highlights two difficult periods for retirees:

The lost decade between 2000 and 2009

The stagflationary period of the 1970s

A retiree who began retirement in 2000 with a traditional 60/40 portfolio would have faced the dot-com crash, followed by the 2008 financial crisis. That kind of timing could force a retiree to reduce withdrawals, return to work, or endure a long period of weak returns.

Return stacking is designed to reduce the role of luck in retirement outcomes.

In one example, a 60/40 portfolio with a 5% withdrawal rate had an 11% chance of failure. At a 6% withdrawal rate, the risk of failure rose to 30%.

By comparison, a 60/40/20 portfolio reduced the failure rate to 5% at a 5% withdrawal rate and 18% at a 6% withdrawal rate.

That is the main educational takeaway: return stacking is not just about pursuing higher returns. It is also about reducing the impact of bad timing and creating a portfolio that may be easier to stick with during difficult markets.

Why Portfolio Structure Matters for Retirees

The traditional 60/40 portfolio was built for a world where stocks and bonds often had strong tailwinds behind them. Today, retirees face a more unpredictable environment, including inflation, geopolitical shifts, and changing market conditions.

That does not mean investors need to abandon the 60/40 portfolio completely. Instead, return stacking suggests there may be a better way to build on top of it.

A strong retirement portfolio should not only look efficient on paper. It should also be something the investor can stay committed to when markets become stressful.

That is one of the most important points from the transcript. The best portfolio is not just the one with the best theoretical design. It is the one that gives investors enough confidence and peace of mind to stay invested when markets get ugly.

Final Thoughts

Return stacking is an approach that allows retirees to keep their core 60/40 portfolio while adding another layer of diversification on top. Instead of paying the diversification tax by selling growth assets to add protection, investors can use a more efficient structure that layers independent return streams into the portfolio.

When paired with strategies such as trend following, return stacking may help provide support during bear markets, inflationary periods, and other challenging environments.

For retirees, the goal is simple: build a portfolio that can handle different market conditions, reduce the role of luck, and provide enough resilience to stay invested for the long term.

Want to learn more from the experts? Watch Rankin Rice Wealth Management’s full YouTube explanation here.