Just because you want to earn decent returns doesn’t mean you’re stuck investing in stocks if you don’t want to. It is quite possible to build a well-diversified portfolio of non stock assets, without giving up the pursuit for meaningful returns and settling for the low rates offered by CDs and bonds. That’s the theme which runs through all of the content on this site.
So the idea behind the Model Portfolio is simply to demonstrate one way in which an investor might put that theme into practice.
Below we illustrate a hypothetical $1.6M retirement portfolio. The capital is divided among 6 allocations- cash, plus five alternative asset classes.
Allocation 1: $300,000 to Asset-Backed Notes, earning 5.5% (assumed rate*)
Allocation 2: $275,000 to Rental Property, earning 10%*
Allocation 3: $275,000 to Life Settlement Contracts, earning 9.5%*
Allocation 4: $350,000 to Fixed Indexed Annuities, earning 6.25%*
Allocation 5: $300,000 to Asset-Based Long-Term Care, earning 4.75%*
Allocation 6: $100,000 to Cash, earning 1%*
Weighted Average Portfolio Return** = 6.7%
This portfolio configuration models out at 6.7%, and does so without any exposure to losses from declines in the stock market. This overall rate is quite a bit higher than what our hypothetical investor would have been expecting if the move had followed the more traditional tactic of coming out of stocks and going into CDs and bonds. Again, this is but one example of a larger theme. But it demonstrates that the difference in outcomes can be significant, and that time spent looking for other options can be time well spent.
*Assumed rates are necessary for demonstration purposes, and are hypothetical. Actual rates will vary by offering and could have different terms from one issuer to the next.
** A weighted average takes into account the fact that some of the holdings are larger dollar-wise than others, and adjusts for the ratios; as opposed to just adding all the rates together and dividing by six (i.e. a simple average).