Building an Investment Portfolio

What’s in this section:

When building and maintaining your investment portfolio, diversity is important. One way to diversify is by investing in different asset classes. But one size does not fit all. The amount you allocate to each asset class will depend on your personal circumstance and investment goals.

Asset Classes in an Investor’s Portfolio

Let’s review the main asset classes:

Public Equity/Stocks

A share in the ownership of a public company. Typically provides moderate returns with varying product risk profiles.

Bonds (or Fixed Income)

A debt instrument; an investor loans money to a corporation or government that borrows the funds for a fixed time period at a fixed interest rate. As a lower risk investment type, the returns tend to be lower. 

Real Assets

Physical or tangible assets that have value, due to their substance and properties. Real assets include precious metals, commodities, real estate, agricultural land, and oil. 

Cash/Cash Equivalents

Cash, bank accounts, and equivalents, which include Treasury bills, bank certificates of deposit, bankers' acceptances, corporate commercial paper and other money market instruments. These securities are low-risk, with corresponding low returns.

How much of your portfolio is allocated to each asset class? Let's look at the typical retail portfolio...

The typical retail investor’s portfolio – breaking it down:

Let’s look at the average retail investor’s portfolio and you can see how yours compares:

Average U.S. Household Portfolio

  • Stocks & stock funds: 66.0%

  • Bonds & bonds funds: 16.4%

  • Cash: 17.7%

 

Unfortunately, according to Bloomberg, the chance of a traditional portfolio achieving 5% return in the next 10 years is ZERO
 

Now let’s compare the retail investor’s portfolio to the more sophisticated investor...

 

The Professional Investor’s portfolio

Industry research shows that professional investors and the wealthy invest at least 10%, and up to 30% of their portfolio in private equity - and 46% of them plan to increase their private equity allocation by 2017.1

 

How are investors expected to change capital allocations to private equity by 2017?

Source: EY 2015 global private equity survey

 

According to TIGER 21, a peer-to-peer network for ultra-high-net-worth investors (net worth between $10 million and $100 million) in Q1 2016, members allocated 23% of their assets to private equity - even more than the 22% they allocated to public equity! 2

 

Average Asset Class Returns

Why are the ultra-wealthy increasing their private equity holdings? Let’s examine the average returns of the various asset classes, including private equity.

 

ASSET CLASS AVERAGE 10-YEAR RETURNS (2007-2016)    
Growth Equity5  11.67%
U.S. Private Equity5                     10.64%
Gold4 7.62%
Diversified Portfolio3 6.82%
Fixed Income3 4.39%
Real Estate5 3.89%
Canadian Equities6 3.36%
International3 3.07%
Cash3 0.80%


Notice in the table above that Private Growth Equity returns are higher than all of the other asset classes.

 

Why retail investors don't have access to private equity

 

Why doesn’t the retail investor have an allocation to private equity? Retail investors have been shut out from private equity for two main reasons:

  1. Private equity firms require extremely high minimum investment sizes to gain entry, usually at least $1 million, but often, significantly higher. For example, most Canadian PE investments are between $15 to $50 million.
  2. Even if a retail investor had the million-dollar check required to invest, they wouldn’t know where to source PE deals. 

 

Sources:

  1. https://www.blackrock.com/investing/literature/investor-education/asset-class-returns-one-pager-va-us.pdf
  2. http://www.usfunds.com/interactive/the-periodic-table-of-commodity-returns-2016/#peri
  3. https://www.cambridgeassociates.com/benchmarks/
  4. http://www.1stock1.com/1stock1_766.htm  
  5. www.ey.com/Publication/vwLUAssets/EY-2015-global-private-equity-survey/$File/EY-2015-global-private-equity-survey.pdf
  6. https://tiger21.com/market-conditions-spur-investment-private-equity-says-tiger-21-report