I am very anti-bond right now with the ultra low rates and very real threat of interest rate risk for longer term bonds. I don't mind cash with the current low inflation (cash including breakable CD's, I-bonds, etc.)
If you want to stay something around 60/40, and don't want to go with bonds, then having 40% in cash seems like throwing away money. Very little cash like investments will even keep up with the current low inflation, giving you a negative real yield that the 60% in stock has to overcome.
Enter my idea of synthetic bonds, or better known as deep LEAP put writing on a major index like SPY for a portion of your investments. I am not saying you should write puts against your entire stock holding, but only write enough puts such that your cash portion has a positive or zero real return.
An example $1M portfolio consisting of 60% stocks, 20% puts, 20% cash.
Inflation rate 3%, cash yielding 2%
Write $200,000 worth of cash secured puts against SPY at $190 strike for Jan 2017 expiration and collect $13 (6.8% return, ~4% annualized)
Say the stock market plus dividends has a return of 6%. Your total return would be 0.6 * 6% + 0.2 * 4% + 0.2 * 2% = 4.8% or 1.8% real.
A 60/40 portfolio with the 40% invested in 2.2% 10 year treasuries would have a return of 0.6 * 6% + 0.4 * 2.2% = 4.48% or 1.48% real. This represents a 17% smaller return on investment than the 60/20/20.
Risk wise, the market would have to drop 10% before you were assigned the puts. You could view this as auto rebalancing
The 10 year treasury bonds have some risk of interest rate increases, and have very little upside if rates decrease. The 20% cash you hold in the 60/20/20 portfolio has no risk, not even from inflation, since it is getting the benefit of a higher overall return than the bond portfolio.