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Is the 60/40 Portfolio the Best Investment Strategy?

December 6, 2024

By: Brianna Avillo

Key Points 

  • The 60/40 portfolio implies that investors allocate 60% to equities (such as publicly traded stocks) and 40% to fixed-income investments (leading example being bonds).
  • As market conditions alter and current economic factors come into play, more investors are seemingly reconsidering this traditional investment strategy.
  • Self-Directed IRAs (SDIRAs) can further diversify your retirement portfolio by granting you access to alternative assets which are generally uncorrelated to Wall Street products.
A colorful retirement portfolio is shown, indicating that the former investment strategy of the 60/40 portfolio has now branched out to alternative investments.

The 60/40 portfolio was designed to attempt a strike of balance between the growth potential of stocks and the more stable income provided by bonds. The aim is to mitigate risk while pursuing long-term investment goals, such as saving for your retirement. While this model is traditionally respected, recent economic changes have led investors to explore other avenues. Alternative investing has become an equally desirable endeavor, as these assets are not typically tied to the consistent ebbs and flows of the public market. Let’s explore how this affects the cultivation of modern-day portfolios.

Diversifying your retirement portfolio to the greatest extent possible is considered the best tactic for ensuring your savings are distributed appropriately and can endure long-term growth. Utilizing alternative assets – such as real estate, promissory notes, precious metals, private placements, crowdfunding, hedge funds, and beyond – can help spread investors’ revenue across a variety of sectors. As investors adapt to entirely new market conditions, some discover that participating in rising trends can help them gain better momentum.

Coins are allocated into groups labeled asset a, asset b, and asset c, depicting that the 60/40 portfolio has changed to 60/20/20.

The 60/40 portfolio was developed in 1961 by American economist Harry Markowitz. It undoubtedly derived from a place of ingenuity, but there have been tremendous changes since its emergence. Now, sticking to this investment mentality may result in under performance. Digital technology has imprinted and shifted the operation of several industries. Moreover, there’s a reported risk increase of bond funds, and a lack of trust may have sprouted for leaving retirement savings’ futures in the hands of stocks and bonds. Particularly with the broad stock market benchmarks down 19% in year 2022. 

This has borne the reconstruct of the 60/40 portfolio towards the 60/20/20 allocation, with 20% reserved for alternative investments. These investment types typically possess lower volatility, work inversely to the stock market, and under certain circumstances, have the potential to provide higher return on investment. These assets also tend to thrive under long-term growth, making them generally a stable source of income for your retirement account. Prior to dispersing your eggs in various baskets, it’s always encouraged that you consult with a financial advisor to clarify that your retirement plan will produce your desired results. 

An exemplary vehicle for alternative investing is the Self-Directed IRA (SDIRA). This individual retirement account permits investors the opportunity to explore alternative assets that line up with an area of interest or expertise. Furthermore, since it is self-directed, you get the chance to take the reins on your retirement savings and make all the decisions regarding your investments. It’s worth noting SDIRAs are generally revered for their tax advantages. Upon your account’s creation, you get to determine whether you’d like your gains to grow tax-deferred with a Self-Directed Traditional IRA or develop completely tax-free with a Self-Directed Roth IRA. 

For this portion of your revised 60/40 portfolio, if you’d like to partake in transaction-heavy investments, you may find a Self-Directed Checkbook IRA more suitable. This upgrades your account with checkbook control, which allows you to execute your everyday transactions without the involvement of your custodian. It also permits owners the ability to invest in real time. The two primary checkbook accounts are Self-Directed IRA LLCs and Self-Directed IRA Trusts. These hold similarities, except an IRA Trust offers more anonymity in investing, and IRA LLCs lets you create multimember accounts. 

The purpose of establishing a diversified retirement portfolio is to prevent any potential substantial losses from occurring. Allocating funds across a widespread amount of asset classes and markets can behave as a hedge against inflation. If the stark market takes an unprecedented dip, your portfolio may be able to stabilize itself as alternative assets are generally uncorrelated to the performance of Wall Street products. Placing your retirement savings in one area – or entrusting it all to Wall Street – can possibly yield unfavorable consequences, as the market is generally immersed in irregularity.  

The wonderful thing about investing outside of the stock market is that what you can invest in is incredibly vast. Tangible assets, private equity, commodities, creative pursuits, and ventures supporting charitable initiatives that align with your beliefs are all accessible. The only IRA unallowable investments are collectibles, S-Corporation stocks, and life insurance. Otherwise, the sky’s the limit. 

A Russian doll version of the piggy bank, expressing that the best investment strategy is to diversify your retirement savings across an array of products and assets, including alternative investments.

If you’re new to the concept of alternative investments, then you may want to view options from a more granular perspective. Here’s a brief breakdown of the most common alternative assets that can help you build your modern-day portfolio: 

An investor has drawn “alternative investments” into a notebook, proving that a well-diversified retirement portfolio has now exceeded the former structure of the 60/40 portfolio.

Real Estate – As a tangible asset, real estate is unlikely to ever reach a zero-dollar value. As a hot commodity, the demand for real estate remains high. Through your SDIRA, you can invest in properties that are residential, commercial, industrial, or simply in raw land. For a more passive role, you can invest in real estate syndication or private real estate investment trusts (REITs)

Precious MetalsLike real estate, precious metals are also tangible. They historically have been a source of value for generations and are typically globally recognized as a form of currency. IRAs have four allowable precious metals, which include gold, silver, platinum, and palladium. With their history and extensive uses in contemporary products, it is assumable that they’ll be prominent earth metals for a long time coming. 

Private BusinessesYou can apply your Self-Directed IRA to private businesses through private placements. This contains a large scope of opportunities such as small businesses, hedge funds, private equity funds, startups, crowdfunding ventures, and more. There are options for prospective investors that range from the newfound, to the accredited. 

Promissory Notes – Your retirement savings can also provide loans to investors while obtaining relatively steady and predictable returns. With these investments, an agreement is drafted between you and the borrower, depicting a repayment schedule, interest rates, due date, collateral, and other relevant information. Aside from safeguarding your savings against inflation, these investments can help a struggling business or fund a startup that focuses on redeveloping a community. 

You may also be surprised to learn that you can invest in some of your passions and implement that into your portfolio. Music royalties, film or television productions, and even Broadway are all allowable Self-Directed IRA investments. 

All SDIRA accounts are required per the IRS to be held and administered by a Self-Directed IRA custodian. Their responsibilities entail following your instructions (including performing transactions at your direction) and completing paperwork when pertinent. They are legally not allowed to offer any legal or investment advice. As the investor and account owner, you are responsible for conducting due diligence on any prospective investment. This includes the source you’re obtaining from, its current industry market, and any attached Investment Sponsor, if applicable.  

Additionally, it’s considered best practice for you to familiarize yourself with prohibited transactions and all IRS rules. Adhering to regulations will keep the integrity of your account and not compromise its tax-advantaged status. Engaging in any prohibited transactions – including intertwining your Self-Directed IRA with disqualified persons – can lead you subject to taxes and penalties. When in doubt, referring to your financial advisor may be beneficial. 

A customer sits across from a fortune teller, and asks, “What do you see in emerging markets?” professing that investing with a modern-day portfolio including alternative assets can lead to less unpredictability.

Before embarking on any fiscal expedition, constructing and embracing an investment strategy can be effective. This may pertain to a broadened horizon of investments, so that your savings are evenly dispersed. While all investments contain risk, investing in this manner can help create peace of mind and a potentially secure and prosperous retirement. 

Our Self-Directed IRA Specialists are rigorously trained in a wide variety of asset classes. We strive to educate you and provide you with all the resources you need, so that you can self-educate, then self-direct, and feel self-empowered. Schedule a free discovery call with us today to learn more about preparing for your retirement. 


Disclaimer: All of the information contained on our website is a general discussion for informational purposes only. Madison Trust Company does not provide legal, tax or investment advice. Nothing of the foregoing, or of any other written, electronic, or oral statement or communication by Madison Trust Company or its representatives, is intended to be, or may be relayed as, legal, tax, investment advice, statements, opinions, or predictions. Prior to making any investment decisions, please consult with the appropriate legal, tax, and investment professionals for advice.

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