Would you rather earn an annual return of 11.5% on your money or 5.4%?

If the answer to that question is a no brainer, why do so many investors choose an asset allocation strategy that earns them only 5.4%?

If you followed the 60/40 asset allocation strategy over the past 20 years, you likely earned around a 5.4% annual return on your money. And if you stick with it over the next 10 years, you’ll make even less.

What is the 60/40 strategy?

According to a recent Forbes article, the 60/40 strategy has been one of the most dominant investment approaches over the last 92 years. It’s been a popular approach because it’s been a favorite of Wall Street brokers and advisors who they can put their clients’ portfolios on autopilot using this strategy – freeing up time to prospect the next ten suckers they can market the same approach to.

With the 60/40 rule, the broker or advisor allocates 60% of your assets to stocks, and 40% is allocated to a mix of bonds and cash. It’s simple and easy to explain. That’s why it’s so popular with brokers and advisors. It can be mass-marketed.

According to the latest asset allocation survey by the American Association of Individual Investors, here is how individual investors allocated their assets:

The idea behind the 60/40 allocation rule is that if stocks go down, bonds – which traditionally moved in the opposite direction of stocks – would pick up the slack to preserve the portfolio. This may have worked in the ’80s when treasury rates hovered near 10%, but that rule no longer makes sense today where the 10-year treasury currently sits at 0.96%.

If you stick with a 60/40 asset allocation over the next decade, you will barely keep ahead of inflation.  

Morgan Stanley recently put out a report projecting the returns from a 60/40 portfolio to be just shy of 3% a year over the next decade. The average annual inflation over the past 30 years has been around 2.5%. Taking into consideration inflation, that’s a projected net annual return of 0.5% per year over the next decade.

Will you be satisfied with a 0.5% annual return over the next decade? If not, then it’s time to reevaluate your portfolio and consider an asset reallocation.

I asked you at the beginning of this article if you would rather make 11.5% on your money or 5.4%. Who wouldn’t want to make more than double on their money?

But what kind of asset allocation would yield an 11.5% return? What kind of investor is earning 11.5% annual returns? University endowments like Yale and Harvard are.

How are they earning these returns? By allocating nearly half of their assets to cash-flowing alternative assets like real estate, private equity, and fixed-income private debt.

Check out Yale’s asset allocation:

Instead of allocating 60% to stocks and 40% to bonds, Yale only allocates 3% to each of those asset classes. The value of income-producing alternative investments cannot be overstated. The universities that allocated a higher percentage of their assets to alternatives saw better returns on their money.

Why are institutional investors like the Yale Endowment so aggressive in investing in alternative assets?

Because their priorities are different from individual investors who are only interested in the growth of their portfolios so they have enough at retirement. The Yale Endowment, currently valued at $31.2 billion, has different priorities.

Their two main objectives are:

• To generate enough cash flow to meet current operating expenses.
• To grow capital for future generations.

Why Cash Flowing Alternative Assets?

Cash flowing alternative assets are ideal for meeting current financial needs while building multi-generational wealth because part of the cash flow can be reinvested to generate multiple streams of recession-resistant income due to noncorrelation to Wall Street.

Would you like to generate the type of returns that would allow you to meet your current financial needs while building long-term wealth?

Then maybe it’s time to reevaluate and reallocate your portfolio.

Do you have the allocation you’ll need to earn 11.5%? Not if you’re working with brokers or advisors. The Wall Street darling 60/40 allocation is simply not going to cut it. It hasn’t cut it for the past 30 years.

While individual investors have been content to make 5.4% the past 20 years from the 60/40 allocation, institutional investors like the Yale Endowment have been plugging away making 11.5% from investing in alternatives.

If your goal is to generate income from your investments while profiting from appreciation and reinvestment, it’s time to consider cash flowing alternative investments like real estate, private equity, and fixed-income private debt.