I’ve read countless articles from fellow financial advisers and investment gurus arguing for and against the traditional 60/40 (stock/bond) portfolio allocation. While many advisers have been trained to regard the 60/40 as a benchmark from the early days of their careers, a low interest rate environment means we need to get more creative.
We are living in a new world. The 60/40 was introduced nearly 70 years ago. Times have changed. In case there is any question about where I stand, put me down as firmly on the side of those who are ready to retire that strategy for good.
The new benchmark is 33/33/33; with your assets divided equally between stocks, bonds and alternatives.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Why is the 60/40 stock and bond portfolio outdated?
It has been covered broadly in the media that stock valuations have become untenable. Inflation is at its highest level in 30 years and rates are expected to gradually increase in the years ahead. Mix those ingredients together and you’d be hard-pressed to find an analyst predicting the kind of returns we’ve seen in the public markets over the past decade.
So, what’s the fix? This is where illiquid assets (alternative investments) — such as venture capital, real estate, private equity and private debt — need to enter the chat. Alternative asset classes provide the benefit of diversification (which is why many investors remain in fixed income) along with a low correlation to stocks. With everyone looking for an inflation hedge ... you are welcome.
Research in J.P. Morgan Asset Management’s “Guide to Alternatives” revealed that allocating just 30% to alternatives in your portfolio can substantially increase your annual returns, while simultaneously strengthening portfolio stability and decreasing risk.
Keep in mind that investment in these assets must be done in conjunction with cash-flow planning. As illiquid assets can’t be quickly sold, or liquidated, they may not be for everyone. But for high-net-worth and affluent investors who don’t need cash in the short-term and are willing take on some temporary illiquidity, alternative investments make sense. Private markets are simply more attractive than stocks. Beyond generating returns, these alternatives also provide greater opportunity for building generational wealth.
Practical examples
Let’s take real estate for example. Real estate can serve as a supplement to fixed income as a vehicle to improve yield for investors with a lower risk tolerance, while providing a hard asset that presents an opportunity for real income. At Manhattan West, we invest through a fund model and focus on mainly multi-family and industrial, but more broadly, there are several REITs that can be purchased to gain similar exposure to real estate.
And then there’s venture capital and private equity, which may be a better fit for an investor who is comfortable taking on more risk and isn’t looking for investment income right away. Allocating a small portion of a portfolio to an early-stage venture capital opportunity makes sense if time is on your side. It may provide a potential for more growth than stocks, especially as companies are staying private for longer and going public at higher valuations. We tend to invest in both early stage as well as late stage (pre-IPO) companies. It’s important that you invest through a financial adviser who has access to an experienced team connected to investment opportunities in both private equity and venture capital. Information about private investing companies is not typically available for public consumption. With the help of your financial adviser, you can determine, on a case-by-case basis, whether a private equity or venture capital investment is right for you.
An alternative investment strategy works best when personalized to the needs of the individual. There is no one-size-fits-all approach to investing, and that includes alternatives. Any financial adviser worth their salt will customize your portfolio with your risk tolerance and time horizon top of mind.
So why isn’t my financial adviser offering alternatives?
Scale. Financial advisers often choose to pile their clients into liquid model portfolios because it’s easier for them to scale without having to truly customize based on each individual client's needs. There is an alarming trend bubbling in the wealth management industry in which firms try to gather as many assets as possible – put the investment side on auto-pilot – so they can spend their time and attention on growth or a sale.
Whether these advisers have deprioritized efforts to include alternative assets in customized portfolios due to a traditional – and frankly outdated – approach to allocation, or out of selfishness, is beside the point. Your portfolio should be tailored to your aspirations and goals, and it may be time to start challenging your financial counsel, asking some tough questions.
Embrace 33/33/33 as the new benchmark. Because Modern Portfolio Theory doesn’t feel so modern anymore, does it?
-
Where to Retire: Living in Portugal as a US RetireeLiving in Portugal as a retirement landing spot has abundant advantages, but do your homework and due diligence first.
-
A Social Security Storm Is Gathering: Here's Your Safety PlanIf Social Security reserves are depleted by 2033, as predicted, future benefits could be cut by as much as 21%. Here’s how to weather the impending storm.
-
A Social Security Storm Is Gathering: Here's Your Safety Plan
If Social Security reserves are depleted by 2033, as predicted, future benefits could be cut by as much as 21%. Here’s how to weather the impending storm.
-
What a Second Trump Term Means for Investing in Water SafetyA new administration focused on deregulation could change the scope of today's water protections. So, what does that mean for the investors who support them?
-
How to Avoid These 10 Retirement Planning MistakesMany retirement planning mistakes are easily avoidable. Here are 10 to have on your radar so you don't end up running out of money in your golden years.
-
Before the Next Time Markets Sink, Do Your Lifeboat DrillsAn eventual market crash is inevitable. We can't predict when, but preparing for the ups and downs of investing is imperative. Here's what to do.
-
This Late-in-Life Roth Conversion Opportunity Spares Your HeirsExpensive medical care in the later stages of life is an unpleasant reality for many, but it can open a window for a Roth conversion that benefits your heirs.
-
Women, What Is Your Net Worth?Many women have no idea what their net worth is, or even how to calculate it. Many also turn to social media finfluencers for advice. Here's what to do instead.
-
Converting Retirement Savings to a Roth IRA? Don't Do ThisYou might want to convert all of your savings to a Roth in one go, but you could end up paying hundreds of thousands more in taxes than you have to.
-
What Is Your 'Enough Is Enough' Number for Retirement?Chasing a 'magic number' for retirement can be anxiety-inducing. Instead, build your plans around a personal number that reflects your individual circumstances.
