2022 will be remembered as one of the worst in recent history for the traditional 60/40 portfolio. Both bonds and stocks suffered huge losses this year because the Federal Reserve raised interest rates at the fastest rate possible to combat inflation.
Since the Fed will keep interest rates high until the end of 2023, the new year could be just as challenging as the previous one, which means investors should focus more on alternative assets such as private equity, private credit and real estate.
According to Yieldstreet fund manager Michael Weisz: The U.S. is already in a recession and conditions will only get worse as the Federal Reserve maintains its aggressive monetary policy. In this environment, investors are finding it increasingly difficult to accumulate wealth.
The Federal Reserve is tightening interest rates and reducing market liquidity.
There are reasons why endowment funds, pension funds and investment firms have significant exposure to alternative assets. Private markets have outperformed traditional markets and also help reduce the volatility in investors' portfolios.
Regarding how big a position investors should seek to build... According to Weisz: real estate, private equity and private credit should make up about 40% of the portfolio and could eventually rise to 50%.
"Pension funds and endowments invest up to 55% of their assets in private markets and that is what retail investors should try to achieve," he said. Investors should diversify their alternative assets exposure into three categories. First, there's private credit and equity. Investors should look for short-term assets with cash flow.
There are a lot of variables and unknowns about how the macroeconomic backdrop is going to shape, and having a shorter duration credit provides a little more flexibility.
The second tranche is real estate. 2022 was a terrible year for U.S. housing markets as new home buyers faced higher home prices and rising mortgages. Although home prices are expected to fall in 2023 due to weaker demand, the housing market is still a solid option for long-term investments. "In the housing market, the highs of the last cycle traditionally prove to be the lows of the new cycle," he said.
The housing sector is likely to outperform commercial real estate.
The third tranche of an investor's updated portfolio will be alternative assets such as art and other collectibles that gain value over time.
