Making the Efficient Frontier More Efficient

The traditional 60% stock, 40% bond (60/40) portfolio, which has remained largely unchanged for more or less the past 50 years, is overdue for an enhancement. Flaws in the “efficient frontier” have emerged, making the 60/40 portfolio no longer the most optimal portfolio per unit of risk. The original study advocating for the 60/40 portfolio used treasuries as the fixed-income portion of the portfolio, and many investors use investment-grade bonds. Both have seen extended drawdowns in 2022. Additionally, as seen in the recent crisis, the correlation between stocks and bonds can change over time.

By introducing additional asset classes, such as private debt, into the asset allocation portfolio, it becomes feasible to create a portfolio that is more “optimal” from a riskreward framework. This supplementation allows for a more diversified and balanced investment approach, potentially yielding better results in today’s financial landscape.