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The other week we talked about the necessity for an Investor to have the right mindset for investing. As in life, we experience disappointments and failures, but it is how we respond (and learn) from these experiences determine our ultimate growth and successes.

“Sometimes we win, sometimes we learn”.

Next in the series will be the discussion on having the right mix of asset allocation and diversification in our portfolio to achieve a solid return while minimizing the risks of loss. Lately, many articles are talking about the death of the 60/40 portfolio, a construct of 60% equities and 40% bonds.

Here are some of the issues many suggest support this claim:

  • High valuations of stocks and low yields on bonds mean the next decade will be challenging for investors to protect the real (after-inflation) value of investments.
  • An investment portfolio of all equities will likely outperform inflation over time, but would be volatile. Think about a reliable source of liquidity such as a portfolio of cash and cash equivalents, like very short-term, high-quality bonds.
  • The traditional 60/40 portfolio will likely neither grow in excess of inflation nor provide much downside protection.

Translation – stocks are already sky high with multiples in the 30X range, bond yields remain at the lower end of the spectrum and now enter inflation which will diminish our long term returns when we are now living longer term.

Not good.

One solution being offered is to simply crank up the equity portion to a 70/30, or 80/20, or even a 90/10. Let’s take a closer look at the terms alpha and beta. In simple terms, alpha measures the return (how much did I make) versus the beta (how much did I go up and down to get there). The higher the allocation to equities, believe it or not, the lower the return because of the more drastic swings in losses and the time it takes to get back to even. Further, with today’s low bond returns, there is little room for bonds to rally and offset when stocks sell off.

The elephant in the room is the glaring problem that most seem to miss that these “experts” are restricting their portfolio construction to 2 asset classes: publicly traded equities (stocks, MF’s and ETF’s) and publicly traded debt (bonds).

What do we see all day, every day on CNBC and Bloomberg? Stocks, MF’s and ETF’s and bonds in your taxable account; ditto for your retirement account.

Let’s look at the standard for Institutional and High Net Worth Individuals, known as the Modern Portfolio Theory. Modern Portfolio Theory was created by Harry Markowitz, a Nobel Laureate, and first published in his paper “Portfolio Selection” in the 1952 Journal of Finance. Markowitz summed it up this way,

“A good portfolio is more than a long list of good stocks and bonds. It is a balanced whole, providing the investor with protections and opportunities with respect to a wide range of contingencies.”

Breaking it down further, Real Estate comprises as much as a 40%, allocation, with private equity and debt (venture capital and hedge funds) at 30%, stocks and bonds at 20% and the remaining 10% in hedges like precious metals.

This is what the “smart money” does, and always has done in various forms for centuries. Stay tuned for further discussion on how experts are beginning to construct these portfolios for the average retail investor.


James Jones
Senior Vice President

Note: CalTier does not provide financial nor investing advice. Please consult your investment advisor before making any financial or investment decisions.

About CalTier

CalTier is a FinTech company changing the way people around the world invest into real estate and other alternative asset classes. CalTier’s Fund is focused on bringing institutional-grade multi-family real estate investments to the everyday investor and removing the complicated barriers that have existed for years.

We believe that everyone should have access to these types of investments regardless of wealth level, experience, skill or location. Our first fund currently has 8 assets totaling 1,200 doors and is growing. Anyone over the age of 18 can invest starting with as little as $500 directly from your computer, tablet, or smartphone.

Together with Alto IRA, we also offer the “no-cost” self-directed IRA, which provides a tax-efficient mechanism for investing into real estate and other alternative asset classes. Read more about that here

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