If you were to do your own research on how to balance your retirement portfolio, chances are you’d come away even more confused than when you started. Plenty of advisors and analysts think the “60/40” (60% stocks, 40% bonds) rule is dead, yet nearly as many will tell you it’s poised for a comeback.
Regardless of prevailing sentiment, one fact remains consistent: the wealthiest and most successful investors don’t limit themselves to just stocks and bonds, so why should you?
Q3 2022 hedge fund letters, conferences and more
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Most people think of crypto when they hear about alternative assets, and while that is a popular alternative, others that are less talked about include private equity, hedge funds, real estate, infrastructure, private debt, natural resource-focused investment pools, securitized art and collectibles, and venture capital.
However, main-street investors have not been able to participate in these exciting opportunities, as ‘alts’ have traditionally only been available to high-net-worth clients.
We’re at the dawn of a decade marked by unprecedented uncertainty, economic instability, and geopolitical risk. Retirement this cycle is unlikely to look the way it did even 5 years ago, and as a result, a recent report from Alto found that 3 out of 4 millennials aren’t confident they’ll be able to retire by their desired age.
Today’s conventional retirement planning strategies may prove insufficient for tomorrow’s retirees, and for retail investors today, alternatives offer a chance at retiring comfortably and securing financial freedom.
Now vs. Then
The good news is that today regulatory reform has made it possible to harness the private funds market for the common good and expand retail investors’ access to higher returns. But when it comes to the $39 trillion pool of American retirement funds, investment strategies and allocations have stuck to the same trends over the last 50 years.
Since the 70s, retirement planners have largely advocated sticking to a 60-40 asset mix, with slightly more exposure to higher-risk equities over steady bonds. While this asset-allocation formula has delivered stability, particularly in an American stock market that has continued to appreciate throughout the last century, past performance is by no means a guarantee of future performance.
In modern capital markets—where hedge funds have entrenched themselves as Wall Street’s center of gravity, and PE-driven leveraged buyouts (LBOs) have fueled one euphoric stock rally after another—the average 60-40 investor has consistently been denied access to potentially superior alternative growth.
How Alternative Assets Can Improve the Long-Term Stability and Success of Investment Portfolios
Alts merit all investors' consideration, not just ultra-high-net-worth individuals. However, until recently the alternative investment market has been largely inaccessible to everyday investors and mostly occupied by the ultra-wealthy.
This inequity is why it’s so important to enable Main Street investors to take part in private markets and alternative asset opportunities, with all the tax advantages of a retirement account.
The upshot with alternatives-focused self-directed IRAs is that, far and beyond the conventional 60-40 mix and irrespective of allocations to mutual funds and ETFs, true diversification today is not possible without exposure to private funds and companies, real estate, crypto, and other alternative investment vehicles.
A diversified investment approach has the potential to reduce portfolio volatility, and alternative investments have historically delivered higher returns to investors beyond the market average over time. It may seem daunting, but 20% exposure to five different asset classes has the potential to outperform a portfolio that only consists of stocks and bonds.
For an example of this model in action, look no further than Yale University’s endowment and the legacy of its former chief investment officer, David F. Swensen, who pioneered this “new” model.
The investment team overseeing Yale’s endowment have faithfully allocated funds into alternative vehicles like venture capital and real estate to achieve an average annual return of 12.4% over the last decade.
This doesn’t mean public stocks and bonds are bad—it means they aren’t the only assets worth investing in. In today’s inflationary climate, retirement investors seeking financial independence and a secure retirement should consider diversifying their portfolio just like high-net-worth and ultra-high-net-worth investors have done for decades.
As always, portfolio balance is essential, but more innovative diversification strategies should be explored by retail investors to hedge against an unprecedented era of market risk illustrated by historic inflation and lingering supply-chain disruptions.
Concern Over Markets, But Hope in Alternatives
Public faith in the markets continues to dissipate, with consumer confidence falling for a third straight month, and Alto’s research finding that 76% of millennials worry a market crash could wipe out their savings.
When market conditions are unstable, portfolio diversification becomes paramount. With the traditional 60/40 mix underperforming, now is as good a time as ever to look beyond stocks and bonds into alternatives.
With that in mind, our data shows that all generations see opportunity in alternatives: 85% of millennials, 81% of Gen Xers, and 70% of boomers expressed interest in learning more about alternatives.
What’s more, a whopping 72% of millennials say that they would contribute more to their IRA each year if they could invest in alternative investments. By fully leveraging the $39 trillion pool of American retirement assets to its full potential, everyday investors can participate in alternative investment opportunities and maybe even become an early investor in the next big thing.
