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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.
STOCKS & BONDS • 60/40 PORTFOLIO • IMPACT INVESTING • ALTERNATIVES
This has been the 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 has been a different story with stocks and bonds having their highest correlation over the past decade. This has led to the 60/40 portfolio having one of its worst years since 1937.
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 reduce portfolio volatility while also enhancing returns. Opportunities we are seeing within this 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:
These 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 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, but multiple asset classes in both the public and private markets. Further, having some assets illiquid has provided better returns by reducing the impulse to sell during market disruptions.
Learn more about ways to diversify your portfolio by reading our white paper on opportunities to invest in Private Markets.
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