Have you fallen victim to the “60/40” strategy?
For decades, financial advisors have pounded the table about this investment approach. The idea was simple:
If the market was booming, your 60% allocation to stocks could help grow your wealth. And in a bust, your 40% allocation to bonds would help limit your losses and provide income.
But as Business Insider just reported, a new study shows that allocating 100% to stocks crushes the 60/40 strategy.
In fact, it could help an investor like you pocket an extra $310,000.
Today, I’ll reveal why — then I’ll give you an even better alternative.
What a Loser
The average 60/40 portfolio tanked by 17% last year. According to an analysis done by Leuthold Group, that’s its worst performance since at least 1937.
So, is this a good time to re-assess its value?
A new study that Business Insider just reported on might certainly lead you to that conclusion.
The study is from financial experts including Aizhan Anarkulova of Emory University’s Department of Finance. It’s called “Beyond the Status Quo: A Critical Assessment of Lifecycle Investment Advice.”
In brief, the study found that “long-term investors who invest solely in equities can expect much higher returns than those who diversify with fixed-income.”
More specifically, it found that:
- With a 100%-stocks strategy, the average U.S. household could accumulate $1.07 million in wealth over forty years.
- Meanwhile, the traditional 60/40 strategy would create just $760,000 of wealth.
Certainly, given the volatility of stocks, including bonds in your portfolio can provide some psychological relief. But for most people, that relief wouldn’t be worth $310,000!
Furthermore, it found that stocks and bonds often moved in the same direction. So much for the general “wisdom” that bonds provide diversification.
In conclusion, the researchers had this to say:
"Bonds add virtually no value for the lifecycle investors we consider.”
Given this new information, what are investors like you supposed to do now?
One Tiny Change with a Huge Impact
Making big changes to your portfolio can be scary.
That’s why most investors don’t make any changes at all.
But what if you could make one tiny change… that had a huge impact?
You can. In fact, with this one tiny change, you could potentially double your returns.
A Magical Way to Double Your Portfolio’s Value
What I’m about to tell you isn’t magic. But it sure might feel like magic.
You see, to make this strategy work, you simply need to re-allocate 6% of your overall portfolio — just 6 cents of every dollar you have invested. But this one tiny move can give you the chance to earn nearly 100% more on your money.
So if you have a 60/40 portfolio worth $100,000 — and you’re not comfortable moving to 100% stocks — you could potentially double your portfolio’s value simply by re-allocating $6,000 of it.
Here’s how it works.
The “Magic Ingredient”
To keep the math simple, let’s say a traditional 60/40 portfolio returns about 10% each year.
But now let’s add some “magic”: private equity. In other words, startup companies.
According to Christian Mueller-Glissmann, Head of Asset Allocation Research for Goldman Sachs, private investments are a “smart bet.” Mueller-Glissmann believes investors should consider “switching up their asset mix as the outlook for stocks and bonds has dimmed.”
According to a research report from SharesPost (an expert in private securities that was recently acquired by Forge), allocating just 6% of your assets to startups can boost your portfolio’s overall returns by 67%.
And with a 67% boost, instead of earning, say, 10% a year, you’d earn 16.7% a year.
Let’s see what that difference would add up to with a hypothetical portfolio of $100,000.
Double Your Wealth with Startups
At an average return of 10% a year, in ten years, a $100,000 portfolio of stocks and bonds would grow into about $259,000.
Not bad.
But in that same timeframe, a portfolio that includes a 6% allocation to startups (just $6,000) would grow to $468,000.
So, as you can see, by allocating just a tiny amount to startups, you nearly doubled the size of your investment portfolio.
Keep in mind, these returns include the winners and the losers. And furthermore, if you happen to invest in a startup like Facebook, Uber, or Airbnb — the type of investment that can deliver 20,000%+ returns — you could become a multi-millionaire.
Bigger Returns — With Just a Tiny Tweak
As you just saw, even a tiny allocation to private equity could help you escape the perils of a 60/40 portfolio and help your nest egg soar.
That’s why we encourage all our readers to dive into the free educational resources Wayne and I put together for you.
These reports show you how to get started investing in the private markets. And they also provide you with tips, tricks, and strategies for finding the best — and potentially, the most profitable — startup investments out there.
You can review them and download them here, for free »
Best Regards,
Founder
Crowdability.com
