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The traditional 60/40 portfolio yielded an attractive 8.9% annualized return for 9 years until 2022. However, in 2022, such a portfolio declined by around 16%.
The reason for this poor performance is attributed to the fact that the high-inflation environment pushed the stock-bond correlation to more than 60%, and therefore contributed to the overall volatility.
Even though the public equities recovered quite well in 2023 (the 60/40 portfolio delivered a 7% return for 9M 2023), the markets remained volatile. And mainly, seven giant tech stocks (Microsoft, Amazon, Meta, Apple, Alphabet, Nvidia and Tesla) accounted for much of the gains .
The future has become highly uncertain and traditional portfolios may generate much lower returns than in previous periods. A reasonable investor will likely want to optimize their portfolios to account for such shifts.
Alternative investments offer investors opportunities to diversify beyond the conventional 60/40 portfolio. They can serve as effective hedges against inflation and strenghen portfolios against economic uncertainties. Exposure to alts (private equity, private credit, real estate, etc.) generate higher Sharpe ratios in both high and low inflation environments in the long-term.
Access to alternatives is becoming more and more democratized via a number of different platforms. By 2025, the share of alts may grow to up to 24% of the total investible market. While institutional investors are already heavily pursuing alternatives as a part of their strategies, private investors should follow suit and explore options available on the market.
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