One of the big investment stories of 2022 was the failure of the 60/40 portfolio. Once a beacon of stability, the portfolio failed to provide safety last year as both the equity and fixed-income markets had negative returns. So, asset management firms are now suggesting higher alternative asset allocations to achieve greater diversification for investors. Daniel Maccarrone, co-head of global investment manager analysis at Morgan Stanley, said the following in research released by the firm, “Alternative strategies, such as those focused on hedge funds, private capital, and real assets, have long been appealing as a potential source of higher yields, lower volatility, and returns uncorrelated with stocks and bonds.” His research showed that adding alternative exposure to a portfolio may reduce volatility and potentially increase returns. Alternatives such as hedge funds, private debt, and real assets are less likely to be volatile since they are less subject to interest rate fluctuations. For instance, data from January 1, 1990, through December 31, 2021, showed that a portfolio of 40% stocks, 40% bonds, and 20% alternatives experienced annual portfolio volatility that was 88 basis points less than a 50% stock, 50% bond portfolio split. It also outperformed the 50-50 portfolio by 45 basis points annually.
Finsum:With the 60/40 portfolio failing to provide safety last year, asset management firms are recommending that investors include alternative allocations for diversification and lower portfolio volatility.