Private Investments: Beyond the 60/40 Portfolio

For decades, the 60/40 portfolio has been a standard of wealth management.

Not only has an allocation of 60% to public stocks and 40% to fixed income assets delivered average returns over the past 50 years to the tune of 10.5% annually,¹ but it has also helped ameliorate market crashes. A Morningstar analysis found a 60/40 portfolio suffered 45% less pain than an all-equity portfolio during major market downturns.²

Despite such past performance, investors have started to question the formula.

Schwab's 2025 Modern Wealth Survey found that 42% of respondents think the classic 60/40 portfolio is outdated. While they still believe in stocks and bonds for their core holdings, roughly two-thirds of those surveyed feel they must look beyond traditional investments for greater diversification and investing success. Indeed, Schwab Asset Management^® believes returns from most major asset classes will underperform their long-term averages over the next decade.

Schwab Asset Management expects the mainstays of a diversified portfolio to underperform their historical averages over the next decade.

Enter alternative investments. Historically, such investments have been limited to institutional or accredited and qualified investors. Now, individual retail investors have greater access to these asset classes thanks to new fund structures with lower investment minimums—albeit with comparatively high fees and limited liquidity and transparency—and are increasingly embracing them to enhance their returns. Eligibility for these investments varies by firm and investment type, but generally retail investors must meet certain income and net worth criteria, in addition to investment minimums.

Let's examine the potential advantages and drawbacks of four types of alternative investment asset classes, for whom they might be appropriate, and how they could complement a traditional investment allocation of public stocks and bonds.

Private companies often partner with private equity funds to finance growth and operations. These funds are managed by general partners (GPs) who identify, acquire, and manage a portfolio of privately held companies to generate returns for their investors, or limited partners. The businesses that GPs invest in or purchase can be early-stage companies, turnaround candidates, or more mature firms with recurring revenues and steady cash flows.

Traditional private equity funds employ what is called a "drawdown" structure, where investors commit to a large, up-front sum—often $5 million or more—that is drawn down, or paid into the fund, as the GP identifies investment opportunities. Investors generally receive distributions after companies within the fund are sold or go public.

However, the recent introduction of so-called evergreen funds allows investors to immediately put their capital into existing portfolios of private companies for investment minimums of $100,000 or less and periodically redeem a portion of their investment up to predetermined caps.

Private credit investments fall into two broad categories: capital appreciation strategies with the potential to produce equity-like returns, and income-producing funds that may deliver higher yields than public markets.

The biggest piece of the private credit market is direct lending, which falls into the latter category and is similar to traditional bank lending but is negotiated directly with private investors. It expanded following the 2008 financial crisis, when stricter regulations forced traditional banks to pull back from lending to midsize businesses, which are often too large for standard small-business loans but too small to issue public bonds. Private lenders stepped in to fill the void, ultimately creating vehicles that retail investors have access to, like business development companies (BDCs) and interval funds.

These pooled investment vehicles raise money from investors to buy, develop, or finance real estate assets not traded on public markets, including apartments, hotels, offices, and warehouses. Depending on the type of property and strategy involved, investors can receive regular income based on cash flows from rents and operating income, capital appreciation, or a combination of the two. Investment minimums, once around $100,000, have dropped to as low as $25,000 over the past 20 years due to the rise of online real estate platforms, which expanded fractional ownership opportunities.

Since the middle of the 20th century, hedge funds have offered investors a way to mitigate market downturns and other risks by taking offsetting positions. The oldest hedge funds—long/short equity funds—take long positions in undervalued stocks and short positions in overvalued ones. Other popular strategies involve attempting to profit from price differences between related investments (relative value), investing in global economic trends (global macro), and taking positions on corporate events like mergers (event driven).

While many mainstream hedge funds require at least $1 million in committed capital and can lock up your investment for years, a newer crop enabled by partnerships with fintechs has lower thresholds and greater liquidity. These include funds-of-funds—which invest in a portfolio of hedge funds rather than directly in stocks, bonds, and other securities—and funds that use third-party platforms, with minimums as low as $100,000. Liquid alternatives—exchange-traded funds and mutual funds that attempt to mimic hedge fund strategies while offering daily liquidity—start as low as $5,000.

When it comes to slotting private investments into your portfolio, there are no hard-and-fast rules about whether or how much to allocate. "We tend to use a core-satellite approach when allocating to alternative or nontraditional investments," Eric says. "That means we think that the bulk or core of a portfolio should still comprise traditional public investments, but investors can consider a modest allocation to riskier satellite holdings like private investments."

Generally speaking, private equity forms part of an equities allocation and private credit part of a fixed income allocation. Private real estate can draw from an investor's allocation to income-oriented inflation-hedging assets, such as real estate investment trusts (REITs), if there is one.

Hedge fund allocations are a bit trickier because they depend largely on the strategy involved and the intended role in the portfolio. Positions designed to boost returns should likely be part of an investor's equities allocation, for instance, while those meant to reduce drawdowns or hedge risk should count toward the fixed income allocation since it plays a more defensive role.

The more difficult decision, perhaps, is picking the right manager. Private investment managers tend to be far more varied in their results than their public fund counterparts. In private equity, for instance, the difference between a manager in the top quartile of performers versus one in the bottom quartile can be nearly 30 percentage points.

Across most asset classes, performance varies widely between the top and bottom managers—but the difference is especially dramatic within private investments.