We have entered a new paradigm of anemic return expectations for traditional asset-allocation models. The prospects of a lost decade ahead are uncomfortably high for portfolios that are 60% invested in stocks and 40% in bonds – particularly when adjusted for inflation, which is at levels not seen since the early 1980s.
But as user-friendly and rewarding as this portfolio has been, investors looking to rebalance their portfolios or put new cash to work are presented with unattractive trade-offs. Fortunately, there is a growing opportunity for the average investor to harness a wider array of return streams. Adding alternative investments to the investment mix can allow investors to maintain their preferred position on the risk curve, but with less uncertainty around the tails and with a higher degree of confidence in long-term outcomes.
There is no one-size-fits-all allocation to alternatives that makes sense for all investors. The sweet spot lies somewhere between “enough to make a difference” and “too much that investors can’t stick with it.” What’s become increasingly clear is that the only wrong answer is zero. Stocks are represented by the MSCI All Country World Index. Bond-market performance is measured by the Bloomberg US Aggregate Bond Index.
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