(Yahoo!Finance) - BlackRock Chief Executive Officer Larry Fink is proposing a new tweak to an age-old investing formula.
Instead of a traditional 60/40 split between stocks and bonds, the prominent asset manager wants everyday investors to branch out and diversify into private market assets.
“The future standard portfolio may look more like 50/30/20 — stocks, bonds, and private assets like real estate, infrastructure, and private credit,” Fink wrote in his annual letter to clients this week.
The 60/40 portfolio invests 60% of your balance in stocks and 40% in bonds. For years it has been the benchmark for many investment and retirement portfolios.
The exact asset mix depends on a variety of factors, such as your time horizon, risk tolerance, and financial goals. And it’s designed for the long haul. You’re not tapping into it to cover your expenses for next year.
The 60/40 portfolio has been a wildly popular ratio because it evens the teeter-totter between your risky investments and your safe investments, resulting in a portfolio with a moderate level of risk that most of us can roll with through good times and bad.
While the past few years of sweet market gains have made that blend pay off in spades, so far this year, we have been soundly reminded: Markets can and certainly do go south.
The success of the 60/40 is being tested by inflation, market uncertainty and volatility, and a “whack-a-mole” array of fiscal, trade, and policy changes.
Fink’s new hypothesis: Creating an investment portfolio that can ride out the swings may require alternatives to traditional stock and bond allocations.
“Generations of investors have done well following this (the 60/40) approach,” he wrote. “But as the global financial system continues to evolve, the classic 60/40 portfolio may no longer fully represent true diversification.”
Yes, there’s more risk
The appeal of a new asset allocation model from Fink’s lofty global vantage point: “While these private assets may carry greater risk, they also provide great benefits,” Fink wrote.
For example: The revenue that infrastructure generates — such as tolls and utility payments — typically rises along with inflation. Unlike public markets, infrastructure returns tend to be far less volatile. And historically, even allocating just 10% of a portfolio to infrastructure boosts overall returns.
“But the challenge is this: The industry isn't structured for a 50/30/20 world,” he wrote.
That’s because to invest in many of these types of private funds, investors must pony up a hefty minimum investment, say, $50,000. Moreover, investors typically must have an annual income of at least $200,000 (or $300,000 joint income) for the two previous years, as well as the expectation that income will reach the same level in the current year, according to an analysis by Amy Arnott, a portfolio strategist for Morningstar. “Investors can also be considered accredited investors if they have a net worth (either individually or with a spouse) of up to $5 million."
Fink gets that. “Bridging the divide between the 50/30 and the 20 is almost impossible for most individuals," he wrote. "Even those who can afford it face another diversification problem within that 20%. Often, they barely have enough capital to meet the minimum for just one private fund — and having 20% of your portfolio locked up in a single fund isn't really diversified.”
50/30/20 for retirement savers
More than half the money BlackRock manages is retirement money, according to Fink.
So it stands to reason that he gave this advice against the backdrop that roughly a third of Americans have no retirement savings, according to a BlackRock survey, and more than half are more worried about outliving their savings than death itself.
Ultimately, Fink’s reading of the tea leaves suggests something has to be done to make it easier for individual investors to create retirement wealth because Social Security isn’t going to sustain those facing longer lifespans.
According to the US Census Bureau, Social Security keeps nearly 30 million Americans from sliding into poverty each year — an extraordinary achievement, he wrote. And yet, projections show Social Security’s retirement and disability funds will run out by 2035. After that, people would get only 83% of their promised benefits, and that percentage will drop over time.
Enter private assets, Fink argues, pointing out that pension funds have invested in them for decades, but 401(k)s haven't.
“It’s one reason why pensions typically outperform 401(k)s by about 0.5% each year. Half a percent doesn't sound huge, but it adds up over time,” he wrote.
BlackRock estimates that over 40 years, an extra .5% in annual returns results in 14.5% more money in your 401(k).
“Put another way, private assets just bought you nine extra years hanging out with your grandkids,” he wrote.
By Kerry Hannon · Senior Columnist
