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Insights Article | April 22, 2022

Adjusting Your 60/40 Portfolio with Alternatives Before Stagflation Takes Hold


Over 10 years ago at a conference in San Diego, CA, the Goldman Sachs Alternative Group advocated the need for alternative investments in a modern portfolio to hedge volatility and interest rate sensitivity. They not only supported having them but to allocate 15% to 20% of a portfolio to alternatives.

The Great Recession of 2008 propelled global financial markets to reassess how to balance portfolios against potential market turmoil in uncertain times. Since then, alternative investments have been on the rise and are now a fundamental piece of investment portfolios.

Forbes reported, “Global alternatives under management have risen from $7.9 trillion in 2013 to over $10 trillion in 2020. The volume is expected to reach $14 trillion by 2023.” In just 10 years, alternative investments are projected to nearly double. Investors are now seeking more upside as traditional asset allocation strategies begin to underperform and inflation and slow economic growth present a rising threat of stagflation. Continuing with a 60/40 portfolio of stocks and bonds presents higher overall risk exposure due to the direct correlation to the market.

The 60/40 portfolio of stocks and bonds was historically preferred for those with a relatively moderate risk appetite to generate reasonably stable growth, and alternatives were seen as an exclusive, more risky investment option. However, that is not the case today. Alternative investments offer more portfolio diversification with no correlation to the stock or bond markets and little to no sensitivity to interest rates, potentially offsetting stagflationary environments and offering more balance to portfolios.

While the 60/40 portfolio is not dead, it does require a tune-up. In a recent Market Watch article, Goldman Sachs says, “Stagflation is raising the risk of ‘lost decade’ for 60/40 portfolio of stocks and bonds” reporting that “60/40 portfolios in the U.S. and Europe are down more than 10% in real terms.” Simply put, if investors fail to adjust their asset allocations during high inflationary times, mixed with high unemployment and slow economic growth, they may run into longer periods of time with weak returns.

With inflation rates as high as 8.5%—the highest they’ve been since peaking to 6.3% in 1990 —signs of stagflation are evident in market performance. The real 10-year yield on Treasury bonds recently ticked above zero for the first time since March 2020, which indicates that rising bond yields could signal a threat to stocks. Similarly, the ongoing geopolitical unrest caused by the Russian-Ukraine war paired with the existing muddled backdrop of disrupted supply chains following the pandemic are posing a threat to economic growth and creating tension in the markets.

Investors are getting rattled and steering for calmer waters by seeking shelter in alternatives to shield against a lost decade amid stagflation. Investment News reports that advisors are allocating even larger chunks of client portfolios to alternatives in an effort to diversify into non-correlated assets, with advisors noting portfolios weighted in 20% to 30% of various alternatives, while others claimed more extreme alternative strategies representing 50% weightings.

Diversification is key in this environment. Real estate, gold, private lending, and commodities are popular alternative strategies to hedge inflationary times. In addition to diversification, performance consistency is an important consideration to reduce portfolio risk and enhance return potential in a volatile market.

As the economy braces itself for stagflation, investors, advisors, and family offices alike are on a quest to secure attractive, risk-adjusted returns not correlated to the market. Risk appetites are changing; time horizons are shifting; and asset allocations are expanding. Customizing investment products for investors may be the best way to balance portfolios before stagflation takes hold.

Wilshire Finance Partners’ private real estate investment strategies provide clients with an alternative source of yield and accessibility to short-term fixed-income alternative real estate investments in first trust deeds and mortgages secured by seniors housing, healthcare, multifamily, and commercial real estate. With no correlation to the stock or bond markets and little to no sensitivity to interest rates, the target annualized return for the Income Fund is 5.5% to 8%.


Learn more about Wilshire’s investment opportunities.

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Don Pelgrim

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