Asset allocation can mean various things, depending on the context. Typically, a long-term allocation might be set at sixty percent stocks and forty percent bonds when discussing an investment portfolio. This ratio was thought to balance risk while still seeking growth. The stock holdings would be likely to grow over time, while the bonds could provide a cushion if the anticipated growth did not occur. Barron's reports that this mix has returned an average of nine percent over the long term.
Recently, however, that has not been the case, as reported by Bloomberg.com. First-quarter 2022 returns for a 60/40 portfolio were down by ten percent for 2022. During the recent years, returns on typical growth-oriented portfolios averaged eighteen percent, but that followed a decade of unsatisfying returns through the 2000-2010 years that brings the overall inflation-adjusted return since 2000 to 7.5 percent, according to figures reported by Morningstar. 1
Financial experts now warn that rising interest rates should lower expectations for growth in both stocks and bonds, cautioning investors to plan for smaller value increases in a 60/40 portfolio.
How Should Investors Decide Their Asset Allocation?
A suitable method for any investor to determine the appropriate asset allocation for their circumstances is by balancing risk appetite and tolerance. Each investor has different goals for their investments, how much they hope to earn, and their approach to risk. Investors can use alternatives to financial instruments as part of a balanced portfolio as one way of pursuing those goals.
The investor's preferred allocation mix may change over time as their goals change or in response to outside needs. For example, suppose the investor decides to remove some capital from their investment to spend (perhaps toward the education of a dependent). In that case, they may reevaluate the distribution of the remaining funds. Often, investors take a more conservative approach as they near retirement, valuing capital preservation more than growth.
Real Estate Can Contribute To Asset Allocation Goals
Investors may want to include assets outside the realm of stocks and bonds when crafting a comprehensive portfolio. For example, real estate assets may be a positive addition. Some investors may want to invest in real estate directly, while for others, fractional investments may be a better approach.
A Delaware Statutory Trust (DST) is a trust that can provide access to commercial properties for individuals who want real estate without the management responsibility. DSTs are packaged investments created by a sponsor that may include multi-family housing, industrial space, office complexes, retail and hospitality structures, and other commercial developments. DSTs are available for accredited investors only, since these trusts are not registered with the Securities and Exchange Commission. As such, they are considered riskier than publicly traded stocks or bonds. A DST investor must be prepared and able to research the offering and be prepared for a holding period of five to ten years.
1. bloomberg.com: Sell-Everything Market Sends 60/40 Funds on Worst Run Since 2008” March 15, 2022