So long, 60/40. Say hello to alternatives in your clients’ retirement accounts.
Even with the recent bounce in stocks from bear market levels and the drop in yields resulting from bond market buying, the drum continues to beat for the end of the standard portfolio split of 60% stocks and 40% bonds. Of course, the question that most often arises in the wake of these calls is what will replace the formerly tried and true — or at least classic back-of-the-envelope — asset allocation.
Milind Mehere, CEO of Yieldstreet, a service that provides access to private markets for both accredited and unaccredited investors, suggests a 20% allocation to alternative assets, with most of that slice coming out of the fixed-income portion of an investor’s portfolio.
As to why he suggests shifting the largest chunk from bonds to alternatives instead of stealing it from the stock allocation, Mehere said investors should take a hint from Wall Street’s so-called “smart money”.
“In the past 20 years, asset owners have allocated more than 50% of their assets to private markets, which explains the AUM growth of asset managers such as Blackstone, Apollo and KKR. The question is why? We think it’s because private markets generated higher returns, while public market allocations became more passive, and because they decreased the risk of concentration as plenty of investors crowded tech stocks,” Mehere said.
Mehere’s Yieldstreet service offers access to alternatives — including via individual retirement accounts — for alternatives including real estate, private equity and private credit, digital assets and blue-chip art through fractionalized shares in diversified collectible portfolios.
Alto IRA founder Eric Satz is also down on the 60/40 model and a major proponent of upping the allocation to alternatives in retirement accounts at the expense of traditional equity mutual funds.
In Satz’s view, most mutual funds consist of a small subset of the same profitable stocks, and piling on additional mutual funds doesn’t offer much, if any, portfolio diversification.
“When I talked about the 60/40 model being a thing of the past, people used to be surprised. But over the past few years, more and more industry experts have come to share this assessment. To understand why, we have to look at the public markets over the past 25 years. In the mid-90s, there were around 8,000 publicly traded companies. Today, that number is about half,” says Satz.
Satz also points out that companies are waiting longer to go public, robbing retail investors of the opportunity to invest in “up-and-comers with the potential for outsized returns”.
As to how advisers should break the news to clients that it’s time to throw out the old 60/40 split and ring in the alternatives, Nic Millikan, managing director at CAIS, said he would start by saying that allocations that worked in the past may not work in the future.
“Ultimately those allocations may turn out to have been riskier than adjusting a portfolio to contain assets where performance is not correlated to the movement of markets,” Millikan said.