Insights & Stories

Written by Nirvan Dani

Asset allocation is far from a new concept.

For decades, experts have promoted its principles, emphasizing diversification and the balance of risk and return. Yet, the once-reliable 60-40 rule (60% equities, 40% bonds), which rose to prominence in the 1980s, struggles to resonate with today’s investor. In an era where information is ubiquitous and liquidity is abundant, new pathways are emerging for those looking to capitalize on the dynamic landscape of risk and opportunity.

As asset allocation has evolved, it is clear that the absolute level of risk in a portfolio should not be a byproduct of asset choices or a mere pursuit of superior risk-adjusted returns. Instead, risk should be a deliberate and central consideration—consciously targeted to meet specific objectives and well within an investor’s tolerance. In today’s environment, where traditional asset classes offer diminishing returns and volatility is often unpredictable, alternative assets present compelling opportunities, but they also demand a more sophisticated approach to risk.

Historically, allocation was viewed through a relatively simple lens—balancing equities and bonds to achieve growth and stability. But in recent years, alternative investments such as private equity, real estate, infrastructure, and venture capital have shifted the dynamics. These assets allow for diversification beyond the public markets, often promising higher returns and unique resilience to traditional economic cycles. However, they also introduce new layers of risk that can be overlooked if we apply the same risk assumptions from traditional asset classes.

The modern investment landscape calls for a recalibration of the risk framework, not only considering the potential returns but ensuring that the absolute risk in a portfolio aligns with both the market environment and the investor’s long-term goals. For instance, private equity can enhance a portfolio’s returns but may lock up capital for years, while hedge funds offer diversification but can introduce complexities like leverage and strategy-specific risks. Cryptocurrencies, too, provide a route to outsized returns but bring extreme volatility that must be consciously managed.

In my view, successful asset allocation is less about chasing the highest returns and more about targeting an optimal risk level that is well-compensated. An effective allocation strategy should maintain a balance: enough risk to capture growth but not so much that the portfolio becomes vulnerable to shocks. In other words, the objective isn’t simply to achieve superior risk-adjusted returns but to ensure that the portfolio’s absolute risk level is neither excessive nor insufficient. By calibrating this balance, investors can more consistently navigate uncertain markets, harnessing the benefits of alternative assets while maintaining a level of stability aligned with their overall objectives.

In sum, the emergence of alternative assets doesn’t alter the fundamental principles of investing but underscores the importance of deliberate, measured risk-taking. A portfolio’s success isn’t just a function of its composition; it hinges on how well the risks of each asset are understood, targeted, and balanced within the portfolio’s broader goals. For today’s investors, the conscious targeting of absolute risk isn’t just important—it’s essential.