The Rise of the 40/30/30 Portfolio: Diversifying Beyond Traditional Assets
Adrian C. Spitters FCSI?, CFP?, CEA? President, Author, Private Wealth Advisor
I Execute Tax-Efficient Investment Portfolio Solutions So That Your Business, Family, And Estate Assets Are De-Risked And Protected Against Financial Risk, Economic Threats, Inflation And Higher Taxes.
Embracing Alternative Investments for Optimal Portfolio Diversification
In the ever-evolving world of investment management, the traditional 60/40 portfolio of stocks and bonds has long been the gold standard for diversification. Historically, investors could count on higher gains from stocks during market expansions while receiving safety and steady earnings from their bonds during downturns. However, in the face of a combination of global inflationary pressures plus central bank policies creating challenges not seen since the 1980s, this tried-and-true approach is no longer providing the same level of risk mitigation and stable returns as it once did. One of the key issues is that stock and bond prices now move in more similar directions and do not provide the same counterbalance they historically have.
The solution? Embracing alternative assets as a powerful diversification tool.
The Alternative Investment Advantage
Alternative investments, such as private credit, infrastructure, and real estate, have gained significant traction in recent years, leading to the emergence of the 40/30/30 portfolio strategy. This approach allocates 40% to stocks, 30% to bonds, and a substantial 30% to alternative assets.
According to a recent study by KKR, a 40/30/30 portfolio not only demonstrated higher annual returns than the traditional 60/40 model from 1927 to 2021, including in both high-inflation and low-inflation conditions but also exhibited reduced correlation to the performance of stock and bond markets. As a result, it delivered greater diversification, enhanced resilience during downturns and better overall returns.
In response, more investors and financial advisors are turning to alternative assets for this needed diversification. The 40/30/30 portfolio with 30% in alternative investments has emerged as a new model for portfolio construction. Considering that 2022 was the worst-performing year for a 60/40 portfolio in nearly a century, a growing appetite for a new investment approach that includes alternatives is thriving among investors looking for a fresh perspective, as the old methods are no longer as effective.
Democratizing Access to Alternative Investments
Historically, alternative assets were a gated market reserved primarily for professional investors and high-net-worth individuals, with minimum investments often reaching into the millions. Less than a decade ago, investing in alternative funds was out of reach for all but the wealthiest, with minimum investments of $1 million or more. For example, hedge funds and private equity funds generally only accepted limited partners who were qualified participants and, therefore, already multimillionaires.
However, today, alternative markets have evolved to become more welcoming and inclusive of a broader investor base. Fintech innovations such as online investment platforms, robo-advisors, and crowdfunding make investing in alternatives possible without a high net worth or six-figure minimum investment. The wealth management and brokerage industries also realize that alternative assets play an important role in modern portfolio construction. There is a growing push to educate investors about these markets using digital educational materials and support from financial advisors.
Even investors with modest resources can now access private markets, contribute to fast-growing startups, and access new diversification strategies like the 40/30/30 portfolio approach. This unlocks new avenues for risk mitigation and potential outperformance that were previously unattainable.
Alternative Assets Getting The Attention They Deserve?
Over the past few years, there have been notable examples of alternative assets outperforming traditional public markets. For example, private equity delivered excess returns of 4.3% per year over public equities from 1981 to 2021, according to data from KKR. Private credit similarly outperformed traditional fixed-income investments, which have notably struggled amid post-pandemic interest rate hikes by central banks.
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This compelling performance has fueled rising interest in alternative investments among institutions, asset managers, and even regular retail investors. According to industry surveys, 53% of investors with at least $10,000 in investable assets expect to increase their exposure to alternative assets this year.
Young investors between the ages of 21 and 42 are leading this charge, as they have been let down by the shortcomings of the traditional 60/40 portfolio in recent years. In this younger age group, 75% of investors believe it's impossible to achieve above-average returns using only stocks and bonds, versus just 32% of investors over age 43, according to research from Bank of America.
All this new demand has pushed the size of alternative asset markets higher, and some projections suggest the alternative investment space may reach more than $23 trillion in assets under management by 2026. While change has been slow, the investment industry is increasingly adopting and welcoming strategies like the 40/30/30 portfolio into the mainstream, reflecting an evolution in the modern understanding of effective portfolio diversification.
A Partnership for Holistic Wealth Management
In response to this evolving landscape, I have partnered with one of Canada's leading private wealth management firms serving high-net-worth clients nationwide. This firm offers professional investment management and comprehensive wealth planning from a client-first perspective, providing affluent Canadians access to sophisticated strategies and solutions usually reserved for the ultra-affluent.
Driven by a "capital preservation first" philosophy, the firm generates consistent, tax-efficient returns uncorrelated to public markets. Through my relationship with this firm and other key industry professionals and firms, my clients gain exclusive access to alternative investments such as private equity, private real estate, precious metals, commodities, government-sanctioned flow-through tax structures, and tax-efficient corporate insurance solutions – all designed to fortify and de-risk portfolios against economic threats, inflation and higher taxes.
Complimentary Portfolio Evaluation
As a valued reader, we are offering a complimentary portfolio evaluation to ensure your investments are optimally positioned for the long term. During this no-obligation consultation, we can provide insights into how we can help you navigate the ever-changing investment landscape and align your portfolio with your financial goals.
To schedule your complimentary portfolio evaluation, email me at [email protected] or use my Calendly Link.
Embrace the power of alternative investments and the 40/30/30 portfolio approach – the future of diversification is here.
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