Alternative Investment

Does the 60/40 rule need revising given the surge in alts?

The recent surge in sales of alternative investment like nontraded real estate investment trusts and business development companies, as well as the rough market for stocks and bonds in 2022, indicate some financial advisors may be ready to reconsider one of the most sacred cows of the investing industry, the classic portfolio model of 60% stocks and 40% bonds, according to a panel discussion on alternative investments at Financial Services Institute’s annual OneVoice meeting in Palm Desert, California.

The revised math for portfolios could eventually wind up in the neighborhood of 55% stocks, 35% bonds and 10% alternative investments, said Michael Alexander, president of Broadridge Wealth Management and Global Managed Services, speaking Tuesday on a panel titled “Alternative Investments: Not So Alternative Anymore.”

Alternative investments include a wide swath of vehicles, from real estate to private loans and hedge funds, and traditionally have only been available to wealthy investors.

Financial advisors are primarily looking for alpha, or excess return above a benchmark, and a way to diversify their clients’ portfolios, said Alexander, who added that the market for alternative investments is growing among less wealthy investors who don’t meet the industry litmus test of possessing $1 million or more in investible assets.

“Portfolios have been allocated 60/40, equities to fixed income,” Alexander said. “I think over the past year, it’s about a 2% to 3% allocation [to alts] for portfolios, and raising it to 7% to 8% going forward. We’re seeing the growth.”

Another executive agreed. “With the 60/40 allocation, in my view, particularly in markets we faced the last year, advisors are starting to question that,” said Erik Niland, associate vice president of investment research and product due diligence at Advisor Group. “Alternatives are a great way to get that diversification that advisers and clients are looking for.”

He added that advisors considering alternative investments are also looking for ways to create low correlation in their clients’ portfolios and provide some cushion from down markets

[More: Changes advisors expect to make in client portfolios this year]

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