Capital Fund Blog - December 19, 2022

A New Standard for Investment Portfolios

True innovation in finance is rare. In 1952, Nobel Prize Laureate Harry Markowitz created one such innovation as a long-term portfolio strategy: the 60/40 portfolio. This concept involves investing 60% of portfolio capital in stocks and 40% in bonds. It offers the potential for high returns from stocks while using bonds to reduce the effect of market volatility and preserve capital.  

Over time, the 60/40 portfolio has become the standard portfolio structure for all financial advisors. Very few question its validity. But here’s the thing: The economic environment today is very different from what it was in the ’50s or ’60s. How can we expect something that worked 70 years ago to still work today?

When financial advisors try to be creative, they may suggest reducing bond allocation to 20% and keeping the remaining 20% in cash. Or they may suggest that, instead of investing all 60% in an index fund, investors can increase their exposure to “value stocks” as opposed to “growth stocks” or “mid-cap stocks” rather than “large-cap stocks.” Or they might suggest allocating a small percentage to commodities. But no matter what, they still want to keep all investments in public liquid assets. 

But what about alternative assets? 

Until only a few years ago, it was almost impossible for a retail investor to diversify into private market asset classes. Only institutional investors — mainly high-net-worth individuals or other institutions — were able to access such investment opportunities and create high-performance portfolios for their clients. 

But now, with the online private markets providing access and affordability, retail investors can invest in fractional shares of private alternatives, such as startups, debt deals, real estate, collectibles, and, of course, digital assets.

We are living in a historical time when new standards for portfolio allocations are about to form. I don’t claim to know what the new standard should be. But I’m confident that in the next three to five years, better strategies for allocating assets in retail portfolios will emerge — strategies that are not 60/40 and that involve more than just publicly listed assets. 

I also argue that fixed percentage allocations are a thing of the past. Allocations should be dynamic and change over the years based on market conditions. And they should be open to including new asset classes that emerge over time, especially if an investor is investing part of their income continuously. This way, retail investors can hedge against the risk of potential inflation and recession.  

About: Ahmad Takatkah

Ahmad comes to KingsCrowd with the perfect blend of venture capital and data science experience. He holds an MBA, is a Kauffman Fellow and has spent eight years working in venture capital, with stops at N2V, Leap Ventures, and ArzanVC. He also spent three years at Carta, a leader in cap table management and private equity technology. In his free time, he runs his own VC and data science-focused blog: where he entertains and educates thousands of readers.

View more articles by Ahmad

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