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The New 40% Allocation Rule for High-Net-Worth Investors

At the end of this month, the current economic expansion that started back in June of 2009 is about to break the record for the longest economic expansion in our country’s history according to the National Bureau of Economic Research, which started tracking expansions after World War II.

With the average expansion lasting around 3.25 years, we may be long overdue for another recession. Just like dogs who can seemingly sense disasters before they strike, ultra-wealthy investors and institutional investors have a knack for sensing economic disasters before they strike.

What can you learn about the recent asset allocation strategies of ultra-high-net-worth (UHNW) investors that can help you prepare for the next recession?

A good place to start is to model the pre-recession allocation of the ultra-wealthy. A peek inside the exclusive TIGER 21 group – a peer-to-peer network of high net worth individuals – is often very insightful.


For background, TIGER 21’s membership base is comprised of more than 500 North American and London-based entrepreneurs and investors, who manage an average of more than $10 million of investable assets per member. 

The net worth figures are undoubtedly higher. Based on a survey of its members as reported in TIGER 21’s Third Quarter 2018 Asset Allocation Report, real estate investments increased to 28% of members’ assets.

On the flip side, exposure to hedge funds, steadily falling, is now at 5 percent, one of the lowest levels since TIGER 21 began collecting this data in 2007. Q3 2018 TIGER 21 ASSET ALLOCATION REPORT (n.d.) retrieved from https://tiger21.com.

The trend is consistent with prior years, with capital moving away from equities and reallocated to real estate. This trend was echoed tn a recent CNBC article, where TIGER 21 Founder and President, Michael Sonnenfeldt, revealed that in 2019 its members are reducing their equity exposure and investing in fixed income Fox, Michelle (Jan. 31, 2009).

“The ultra-rich are investing differently in 2019”

Real estate investing, especially commercial real estate (e.g., office, industrial, retail, multifamily, hotel, vacation rentals) has long been used effectively in UHNW and family office portfolios for producing fixed income in a yield‑deficient market.

And it’s not just individuals abandoning equities for alternative assets like commercial real estate in the face of an impending recession. Witness the reallocation by institutional investors like university foundations and private foundations away from equities to alternative investments over the past 20-30 years.

The 60/40 portfolio allocation strategy is the go-to investment strategy by financial planners and advisors. It’s simple and churns fees. The 60/40 Rule, which allocates assets between stocks and bonds 60/40, is a classic approach to allocation, but it’s also outdated and, in the face of recession, outright dangerous.

The 40-year-old 60/40 rule was created when bond yields averaged 8% and the stock market 12%. But with the average bond yield at 1.6% for the last 10 years, this strategy is obsolete and if your financial advisor has you in a 60/40 allocation mix, you may be in trouble when the next recession hits.

What was Wall Street really trying to accomplish with the 60/40 Rule?


At its most basic, the 60/40 Rule was designed to provide decent returns during good times through stocks while hedging with bonds during downturns. However, in today’s economy, the dead weight of bond yields (1.6% average in the past 10 years) is one major reason the 60/40 rule may no longer work. The idea was that the 60/40 rule offered the diversification, but bond yields moving in the same direction as stocks defeat this purpose.

UHNW and institutional investors have been anticipating this trend for years and have allocated away from equities toward alternative investments accordingly. In reaction to the 60/40 Model, the Endowment Model was created, which diversifies away from traditional equities towards more inflation hedging assets.

The Endowment Model has gained a lot of traction thanks largely to one person, David Swensen, who has been the chief investment officer at Yale University since 1985. Swensen’s Yale Model, which is a variation of the Endowment Model, allocates a majority of the portfolio in alternative assets.

Under Swensen’s guidance, the Yale Endowment saw an average annual return of 11.8% between 1998 and 2018. During this same time, the S&P averaged an annual increase of just 6.16%.

Historically, the average inflation-adjusted S&P return has averaged a slightly better 7.53%.

What would $100k be worth today if you invested in an S&P index fund in 1926 vs. something closer to the Yale Model that returned 11.8%?

Model: S&P 500 Endowment Model
Ave.Return 7.53% 1 11.8%
Investment in 1926 $100,000 $100,000
Value at end of 2018 $85,557,297.83 $3,199,541,371.68*

1 Source:macrotrends
*Past performance not indicative of future results

Among the alternative investments favored by the Yale Model, commercial real estate is consistently at the top of the list with an allocation consistently above 12%.

For above-market returns and a hedge against recession, commercial real estate offers the best of both worlds. The 20-year return on real estate has averaged 10.6% while a 60/40 mix of stocks and bonds would have returned an average of 7.32%.

Commercial real estate offers far superior returns while protecting against downturns since alternatives have a low correlation to the broader markets.

Is the Yale Model really recession resistant?

The proof can be found as recent as 2018. While the S&P was down 4.38% for 2018, the Yale Endowment reported a return of 12.3%.

Buffered with volatility resistant assets like commercial real estate, the Yale Endowment not only weathered the 2018 storm that hit the equities market but it thrived.

Based on the foregoing data, it’s no surprise that as we creep up on another recession, high-net-worth investors are turning away from equities and turning to income generating alternatives like commercial real estate.

Just like UHNW investors and university endowments who are sounding the alarm on the next recession, to protect yourself from the next downturn, follow their example and look to commercial real estate for above-market recession-resistant periodic income.