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By Katie Klingensmith, Chief Investment Strategist

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For decades, the 60/40 portfolio – 60% stocks and 40% bonds – has been the paragon for investment allocation. However, in today's evolving financial landscape, new asset classes are finding their way into these industry standards, with private investments – those assets that are not listed or traded on a public exchange – taking their place. Some even suggest allocating as much as 20%, leaving stocks at 50% and bonds at 30%.

This isn't a recommendation to abandon proven diversification principles. Rather, it represents an evolving conversation about how investors might take advantage of a new area in financial markets, one that until recently was the domain of institutional investors. These assets have in many cases commanded higher returns, compensating investors for being willing to lock up their money for a long time. But are they right for you? Do these investments make sense for all investors, and what might be the risks and reasons to not over-allocate?

We find the suggestion to invest a full 20% in private assets to be too aggressive for most households. At ��Ѩ��Ƶ, our focus is on what’s right for our clients. As fiduciaries, we are quick to question the fees, liquidity constraints and potential lack of transparency in this emerging space. However, these new private assets may be an exciting option for those investors who can afford – and be patient enough – to invest in these long-term and sometimes rather complex investments. The potentially higher and diversified return streams can be compelling and encourage those among our clients with the appetite and means to explore up to a 10% exposure.

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Understanding the role of private investments in a portfolio

Private equity and debt markets currently represent approximately $12 trillion in value – roughly 10% of public markets' $125 trillion – and are growing as a significant portion of overall capital allocation. This makes sense given how many companies in the U.S. are small or privately held and therefore don’t get traded on a stock or bond exchange.

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Private markets have grown quickly over the last several decades

Data source: Preqin, December 2000 through September 2024. To avoid double counting of available capital and unrealized value, fund of funds and secondaries are excluded.

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Previously restricted primarily to institutional investors, private market opportunities are increasingly available to individual investors through various fund structures and investment platforms. These new options provide more access and transparency for individual investors, lower investment minimums and shorter lockup periods when the investments cannot be sold.

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Definitions

Private equity: Investments in private companies that are not listed on public stock exchanges. For example, a private equity firm might buy a controlling interest in a tech startup to help it expand its market reach.

Private debt: Loans or credit provided to companies that are not traded on public markets. For instance, a company might secure a private loan to finance its new product development without going through traditional banks.

Liquidity: The ease with which an asset can be quickly converted into cash without significantly affecting its price. In the context of private investments, there can be “gates” or very specific limits on the amount of withdrawals from a fund during periods of high demand to protect the fund's stability.

Fiduciary: A person or organization that acts on behalf of another person or group, putting their clients' interests ahead of their own, with a duty to preserve good faith and trust.

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What are the advantages of private assets?

Private investments can potentially enhance portfolios through several distinct advantages:

• Differentiated return drivers – Private equity offers growth potential by investing in companies at earlier stages or during transformational periods, while private debt can provide diversification through varied income streams often having lower correlation to public debt and equity markets. For private debt, this is thanks to the floating rate nature of much of the debt that it is typically held to maturity, as well as issuers, including sectors not typically available in the public markets, such as real estate and infrastructure. For private equity, this can also be due to different sector exposure as well as active management and less exposure to short-term economic cycles.
• Access to emerging opportunities – Private markets allow investors to participate in innovative companies and sectors before they reach public markets and outside of some restrictions that can hamper growth such as specific regulations and investor pressures. This potentially captures value creation earlier in a company's lifecycle.
• Private equity value creation – Private equity firms can help businesses grow by making them run more efficiently and focusing on what they do best. They can also bring in better systems, stronger leadership, and clear goals to boost performance and profits, lifting the value of the company.
• Portfolio diversification benefits – Adding appropriately selected private investments may enhance overall portfolio resilience by introducing assets that respond differently to economic conditions than traditional stocks and bonds.

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Important drawbacks of private investments

While adding private investments might seem like an obvious portfolio enhancement, the reality is more nuanced and requires careful consideration. Several significant drawbacks deserve attention before allocating to this asset class include:

• Illiquidity risk – Private investments typically cannot be quickly sold, often locking up capital for years, which may impact your financial flexibility. When public markets like the S&P 500 are down because of economic or other stresses, it will likely be very difficult to sell private investments. ��
• Valuation challenges – These assets aren't traded on public markets frequently, so they don’t have prices that are updated daily. This creates potential pricing uncertainty, especially during periods of market stress. Ironically, this can hide some of the ups and downs that are present in public markets.
• Higher cost structure – Private investments generally carry higher fees and commissions compared to many public market investments, potentially eroding long-term returns.
• Limited transparency – These investments typically offer less transparency and regulatory oversight than public markets, requiring more extensive due diligence from both advisors and investors.

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��Ѩ��Ƶ' approach to private investments

At ��Ѩ��Ƶ, we have a long history of providing comprehensive financial planning to a broad American population. As industry leaders in diversified portfolios, we constantly evaluate evolving investment strategies while maintaining our core principle: a client-focused approach.

Private investments aren't appropriate for all clients. For qualified purchasers who meet both regulatory requirements and our suitability standards, we typically recommend a modest allocation of 5% to 10% for private investments. This option has become more compelling as the offerings themselves have evolved to include well-diversified funds that are accessible to individual investors.

Our analysis indicates that allocations below 5% generally provide negligible portfolio benefits, while allocations above 10% may introduce excessive illiquidity risk for most individual investors. This targeted approach allows clients to potentially benefit from private market exposure while maintaining sufficient portfolio liquidity. Had we included the private equity fund we ultimately selected as an option for our clients, it would have contributed a modest uptick in rewards based on historical performance.��This is of course no guarantee that such outperformance would continue.

The bottom line: We think this area of capital markets is growing and it may offer differentiated and higher gains. However, for everyday people, the lack of access to your investment – especially when markets are turbulent – and the more limited information about what’s in the portfolios means we don’t think these investments are for everyone. For those with the means and appetite as well as a long-time horizon, we think holding up to 10% is a logical and prudent approach.

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Why fiduciary commitment and due diligence matter

For investors with longer time horizons, higher risk tolerance, and sufficient liquidity elsewhere in their financial lives, incorporating a measured allocation to private investments may provide diversification benefits. However, for many investors, particularly those approaching or in retirement, maintaining greater liquidity and simplicity may better serve their financial needs. As we showed above, private markets represent about a tenth the size of public markets; we are reluctant to suggest our clients allocate more than this share, especially given the constraints that everyday investors might encounter.

As fiduciaries, we receive no additional compensation for recommending private investment products. Our recommendations are never incentive-based but always focused on what we believe is in our clients' best interests.

When evaluating private investment opportunities, we emphasize well-diversified funds with specific characteristics: multisector exposure to maximize opportunity sets, manageable tax complexity, lower minimums to enable appropriate position sizing, competitive fees, and properly managed liquidity terms that align with portfolio needs.

At ��Ѩ��Ƶ, we believe the most successful investment approach isn't about following specific allocation rules but developing personalized strategies aligned with your unique financial journey.

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'Qualified purchasers', or 'accredited investors,' are defined by the Securities Acts of 1933 and 1940 respectively, and outline the qualifications of individuals or entities deemed to possess the requisite financial sophistication and resources to evaluate and bear the economic risks associated with investments that are subject to reduced regulatory oversight.��

This article does not take into account the particular investment objectives, tax and financial situation, or other needs of any specific individual. Therefore, each individual should consider their own financial goals, objectives and risk tolerance and consult with their financial advisor before making any investment decisions. Additionally, investors should carefully review the investment objective, risks, charges, and expenses associated with alternative investments. In general, alternative investments involve a high degree of risk, including potential loss of principal invested.