Virtually every major institutional investor holds on average 25% of their portfolio in private alternatives, due to their historically higher returns (2016 Blackstone Report). These private investments, however, have been largely inaccessible to the average investor until now.
Fundrise leverages new technology to allow every investor to upgrade to an advanced portfolio. We have gone back to the drawing board to rethink the way individuals invest their money. Our updated take on portfolio theory, Modern Portfolio Theory 2.0, diversifies investors into higher-return-potential private market investments similar to the portfolio models used by major institutional investors.
Traditional Portfolio Theory 1.0
Conventional wisdom says that as an individual investor you can’t possibly outperform the market, so instead you should follow traditional portfolio theory. What is traditional portfolio theory? Essentially it breaks down to the notion that your investment portfolio should be a balance between publicly traded stocks and bonds, with the ratio between the two being derived by subtracting your current age from 100. So assuming the average investor begins investing when they are 30 years old, portfolio theory dictates that 70% of their portfolio should be allocated to stocks and 30% to bonds.
While there is merit in the idea of weighting towards more growth early in your life and shifting towards more stable income streams as you near retirement, traditional portfolio theory has one major shortcoming: the notion that the only option for investing is in the public markets.
For the first time, advancements in technology and financial regulation have opened up the world of private market investing to the public. So in an environment where bonds are expected to return 0% to 2% over the next two decades, and global equities are expected to return between 4.0% and 6.5% (McKinsey Global Institute (MGI)) perhaps it’s time that we all revisit this outdated allocation model.
Modern Portfolio Theory 2.0
If you look at the investment strategies of the world’s most successful investors, you’ll notice that contrary to traditional portfolio theory, a large portion of their portfolios are dedicated instead to private market investments. Private market investments are less liquid than public equities, but as a tradeoff have historically achieved higher returns (Why Private Markets Outperform Traditional Publicly-Traded Stocks and Bonds). In recent years, institutional investors have been shifting a greater portion of their portfolio allocation to alternatives in the private markets in order to meet their target returns. According to a 2016 Blackstone Report, the average institution has over 5x as much of their portfolio allocated to alternative investments than the average individual.
The report also found traditional investment advisors were less likely to recommend alternative investments due to lack of education in the investment approach. So not only has the private market been reserved for the largest institutions and investment funds, but also when you find a way to access the private market, your advisor probably doesn’t know enough about it to guide you through it.
Advancements in technology and federal regulations have given everyday investors the chance to invest in the once-unattainable world of private markets. All of this innovation demands that average investors fundamentally rethink how they invest their long term savings. Asset allocation in the 21st century will no longer be limited solely to public markets.
Given these advancements, our new allocation axiom should be based around diversifying your liquidity needs in order to capture the higher long-term return potential. As you get older and have a greater need for liquidity, you can begin to shift your allocation from private to public investments. But for the time being, why pay for something you don’t use?
We started Fundrise because we knew there was a better way to invest, but that the majority of investors couldn’t get access to private investment alternatives. By building the first private market, direct investment platform, we’ve now made it possible for the everyday investor to have a portfolio like the most sophisticated, multi-billion dollar investment funds.
By combining technology with new federal regulations, Fundrise brings the once-unattainable world of private investments directly to to you. Technology has changed almost every aspect of our lives in the 21st century, it’s about time your investments caught up.