investing
native investments . But what types of alternatives ? How should their allocation in their personal and retirement accounts differ ?
Personal Accounts . Because they are primarily focused on capital appreciation , and have no immediate cash-flow needs , the Smiths can afford to lock up capital for an extended period of time . Their allocation would be as follows : private equity 10 %, private real estate 5 % and equity hedge 5 %.
Retirement Accounts . Because the Smiths will be retiring in the next five years , they will need a combination of growth and income , and will want to buffer market shocks . Their allocations would be as follows : private real estate 10 %, private credit 5 % and relative value 5 %.
The case study is designed to illustrate how to allocate capital for a sophisticated investor with significant wealth and in- figUre 2 :
Proposed allocation
Personal aCCounts stocks 60 % bonds 20 % alternatives 20 %
retirement aCCounts stocks 50 % bonds 30 % alternatives 20 %
come . Advisors should determine the appropriateness and amount of capital to allocate using several factors , including investor eligibility , risk profile , cash-flow needs , sophistication , time horizon and the goals they are trying to achieve . For private market funds , advisors should determine each client ’ s liquidity needs , as these funds should be viewed as longterm investments ( seven to 12 years ).
Conclusion
We can learn a lot by observing how institutions allocate capital . We adopted the 60 / 40 portfolio because we wanted to follow the institutional approach . As institutions have evolved their approach over the years , they increased their allocations to alternative investments to meet their portfolio needs — growth , income , defense , and inflation hedging .
Product evolution has helped democratize these once-elusive investments by making them available to a larger group of investors , at lower minimums and with more flexible features . Advisors should use these versatile and valuable tools to achieve their clients ’ goals .
tony DaviDow , cima , is president and founder of t . davidow consulting llc .
1 . Andrew Bary , “ Yale Endowment Has Just 2 % In U . S . Stocks . Don ’ t Expect Major Changes Under The New Investment Chief ,” Barron ’ s ( September 2 , 2021 ), www . barrons . com / articles / yaleendowment-only-2-percent-u-s-stocks-51630535033 .
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