Key takeaways
- Financial advisors use the “60-40” portfolio allocation – 60% stocks and 40% public fixed income to simplify asset allocation.
- The wealthiest Americans have typically allocated a portion of their portfolios to alternative assets in search of diversification and a higher risk-return profile.
- Yieldstreet’s platform offers most investors the potential to optimize their portfolios with the opportunity to create a 60-20-20 allocation.
The 60/40 portfolio structure has been a staple investment strategy, pushed by scores of financial advisors for its relative straightforwardness and user friendliness. The recommendation was to allocate 60% of your portfolio in stocks and the rest in public fixed income securities (sovereign and corporate bonds), in order to provide a balanced mix of upside potential (through equities) and downside protection (through fixed bond returns).
As a savvy investor, you surely noticed that bond yields have been tanking post the great financial crisis (GFC), as central banks tried to support growth by cutting short-term rates and stepping up to buy large amounts of sovereign debt. A typical US Treasury security, which used to yield 4-5% for the twenty years leading up to the GFC, now returns approximately 2% – hardly a return at all and much below the current accelerating rate of inflation. Bonds have appreciated to the extent that the remaining upside is very limited – after all, how much lower can rates go, unless you want to experiment with negative rates as Europe and Japan did? If you had invested in bonds in 2007, your returns would have been quite fabulous. But it would also be time to consider selling, as rising inflation and full employment are pushing the Federal Reserve and other major central banks to target higher short-term rates, with the potential for longer-term rates to also increase.
As equity investments continue to be the cornerstone of a portfolio – after all, US markets return on average 10% a year – the fixed income part of your portfolio deserves a little revamping, while keeping a healthy level of diversification and perhaps even increasing it.
Enter the 60-20-20 allocation
While downside protection suggests you leave 20% of your assets invested in publicly traded fixed income securities – could be corporate bonds, sovereign or quasi-sovereigns – you may wish to consider allocating the remaining 20% to alternative assets. After all, many of the top 1% of the US population have an allocation to alternatives, and it has worked well for them.
Alternative investments can provide typically uncorrelated returns, potentially lower volatility, and the benefits of a longer time horizon, and in some cases have the potential to offer higher returns compared to more liquid public market instruments.
Alternatives carry their own risks, and you will have to find the specific allocation that is right for your investment needs and for your risk profile.
Here are a few common alternative asset classes to consider:
Real Estate – Many already invest in real estate through their primary home. Investors may consider investing in real estate through a second property or through managed indirect real estate opportunities, a way to generate cash flow via rents and capital appreciation if real estate prices increase.
Private Equity and Credit – Private markets may include private equity and private credit opportunities, and are by definition less liquid and less easily accessed, which comes with trade-offs. Among the potential benefits are more limited competition for investors and returns that are generally less sensitive to headline and short-term market risk. While private markets have traditionally been reserved for qualified investors, Yieldstreet has broadened access to them. Check our private market products.
Commodities – Commodity investments are usually a good inflation hedge. However, they are volatile and hard to access for retail investors. They also require a high level of technical knowledge.
Art & Collectibles – Art has been a popular store of value for decades and gives the investor some aesthetic pleasure with the potential for price appreciation over time. Yieldstreet offers access to fractional ownership through both a dedicated art fund, and through our registered fund offerings.
Learn more about the ways Yieldstreet can help diversify and grow your portfolio
1. What Is the Efficient Frontier? – Investopedia
2. Are You A Robot? – Bloomberg
3. What Is the Average Stock Market Return? – NerdWallet
What's Yieldstreet?
Yieldstreet provides access to alternative investments previously reserved only for institutions and the ultra-wealthy. Our mission is to help millions of people generate $3 billion of income outside the traditional public markets by 2025. We are committed to making financial products more inclusive by creating a modern investment portfolio.
2 Represents an net annualized return, using an internal rate of return (IRR) methodology, with respect to the matured investments shown in your Portfolio experience, utilizing the effective dates and amounts of subscriptions and distributions to and from the investments, net of management fees and all other expenses charged to the investments.[read more]