Is 50/30/20 The New 60/40?
The 60/40 portfolio has been a stalwart for a generation. But as equity markets have moved into bearish territory to start 2022, bonds have also suffered unexpected losses. The bonds are supposed to the ballast to the equities in your portfolio, especially in volatile times. That has not happened this time. Bonds already had challenges providing the yield in this extended low-rate environment. While low rates might not last much longer, the volatility experienced by the bond markets aren’t what investors planned on. Are alternative investments a solution to provide the yield and lower volatility that your portfolio needs?
In modern portfolio theory, the goal is to spread your risk across different asset classes and to have non-correlated assets working together. Professional money managers have been using alternative investments in their portfolios in this way since trading began. Foundations, institutional investors, private wealth advisers, and family offices have been moving assets from public markets to private markets for 30 years, but it has really increased in the last 15. And in the last 5 years, access to these types of investments have finally moved toward the mainstream.
There are lots of types of alternative investments. REITs(Real Estate Investment Trusts), Private credit/debt, Hedge funds, Private equity, Venture capital are the mainstream ones. But there are always new ones being added to the world of non-traditional investments. Think artist music catalogs, wine/spirit collections, high end art, all of these have been bundled or been made available with investable shares.
What are the advantages of alternatives?
- Hedge – Designed to increase in value when core exposures are falling
- Diversify – Low/moderate correlation to core equities with different return drivers
- Modify – Less volatility than core equities with similar drivers
- Amplify – Seek higher returns than core equities in less liquid markets
What are the disadvantages alternatives?
- Liquidity – Can have long lock-up periods
- Access – Some can have very high minimums and require being an accredited investor
- Expense – More expensive than traditional equities and bonds
- Complexity – Making fewer investors comfortable
Back to the original question, do alts belong in your portfolio? If you are an investor that is comfortable with some of disadvantages, then alternatives can be a great value add to your portfolio. But understanding your goals and cash flow needs is where all portfolio construction begins. Working with an adviser can help you figure out where alternatives might fit in meeting those needs.
Do you have questions about your portfolio? Lets chat!
This content may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.