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The 60/40 portfolio, or 60% stocks and 40% bonds, has been a keystone of financial planning for the last five decades given its ability to weather numerous market cycles. Unfortunately, the portfolios underlying characteristics have changed over time that has resulted in it being less effective during market disruptions.
STOCKS & BONDS • 60/40 PORTFOLIO • IMPACT INVESTING • ALTERNATIVES
The 60/40 has been successful in the past as a result of being able to benefit from appreciation of stocks over decades and protection from the bond portfolio which has performed well in downturns such as the dot-com bust and the global financial crisis in 2008-2009. However, 2022 was a very different story with stocks and bonds having their highest correlation over the past decade. This led the 60/40 portfolio having one of its worst years since 1937.
Factors that have led to the 60/40 being less effective include:
Stock Market Volatility & Concentration: Stocks have become more volatile over the last two decades as investors and large institutional investors reallocate capital rapidly during times of market disruptions causing greater downside moves compared to history. Further, concentration in major indexes has increased dramatically and much of the return of stocks can be contributed to a few big names in the market (i.e. Apple, Microsoft, Amazon, etc.).
Changing Correlations: Traditionally, stocks and bonds have had a negative correlation, meaning that when one asset class performed poorly, the other tended to perform well, providing diversification benefits. However, the negative correlation between stocks and bonds has weakened or become more positive in recent years leading to limited protection during market volatility.
Evolving Investment Landscape: The investment landscape has evolved, with new asset classes gaining prominence. Alternative investments such as real estate, private infrastructure, private equity, and private credit have attracted attention from investors seeking to diversify their portfolios beyond stocks and bonds. These alternatives may offer better risk-return characteristics compared to the traditional 60/40 allocation.
With the advent of new strategies and services, such as Citizen Mint, access to alternatives has increased significantly over the last few years. As a result, advisors should be looking for ways to diversify clients portfolios beyond traditional assets classes leading to better portfolio diversification and portfolio outcomes.
We have witnessed many investors question how diversified their portfolios are in traditional asset classes like stocks and bonds given highly correlated returns more recently. This has led them to seek diversifying alternatives in the private markets space where they can seek to reduce portfolio volatility while also enhancing returns. Compelling opportunities we are seeing within the private market space include:
Private real estate is a great diversifier for portfolios that can provide many benefits over multiple market cycles. Benefits of the category include:
Infrastructure assets provide essential or necessary services, have long useful lives and generate cash flow and earnings that vary minimally through market cycles. An example could include renewable energy assets such as solar or wind power that sign 20-to-30 year contracts for energy production with a customer such as a local utility or a large corporation. Benefits of these assets include:
Private market debt has grown significantly since the global financial crisis as banks have dramatically reduced lending to meet regulatory and capital requirement needs. This has led to private debt funds becoming the main source of financing for private equity firms that are seeking to buy and sell companies. Private debt can also be used for real estate projects and other ventures. Benefits include:
While we don’t know what the future holds, we do know that diversification and compounding over long periods of time works well for investors. Diversification in this case is not just traditional stocks and bonds where correlations between the asset classes have increased, but multiple asset classes in both the public and private markets. Further, having some illiquid assets can both reduce investor volatility and the impulse to sell during market disruptions. It further has the potential to enhance returns and meet investors goals both financially and personally. Learn more about private market investment opportunities by clicking the button below.
Learn more about ways to diversify your portfolio by reading our white paper on opportunities to invest in Private Markets.
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