Constructing portfolios with less downside capture is critical to building long-term wealth, says this advisor and former NAPFA chair.
Modern Portfolio Theory
Just slightly over one year ago, inflation was not a concern; since then, it has spiked enormously and reached levels not seen since the late 1970s and early 1980s. Right now (late April 2022), inflation is over 8%, as measured by the consumer price index, and the latest producer price index increased at an annual rate that exceeds 10%. Building a balanced portfolio means combining different asset classes that can respond positively to other economic conditions. Having Natural Resources and Real Estate is essential since they can provide some protection against inflation.
Most individual investors’ portfolios include only two asset classes: public domestic equities and bonds, the “risky” and “safe” asset classes, respectively. This traditional portfolio (colloquially referred to as the “60 / 40” reflecting a typical allocation to equities and bonds) did not perform well from 2000 – 2010 but did well over the most recent ten years from 2011 – 2021.