Going Private: The Case for Evolving the 60/40

Overview:

Every generation of investors inherits a formula. Ours inherited the 60/40 balanced portfolio: put 60% in stocks, 40% in bonds, and let time do the heavy lifting. The 60% is the growth engine and inflation hedge. The 40% cushions market drawdowns and provides an income stream. For most of the last few decades, it has worked well.

We're not here to tell you the 60/40 is dead. It isn't. But the world that made it so powerful is not the world we invest in today. The investment universe has evolved, and the opportunity set has changed.  A growing share of the economy now lives entirely outside the public markets, so a portfolio built only from public stocks and public bonds is opting out. For years, opting out didn’t cost much. An investor could ignore the private markets and still own a well-diversified balanced portfolio. That may no longer be true.

Diversify’s Take:

Long-Term Structural Shifts:

Four trends brought us here. Two changed where the opportunity resides. Two changed who can access it. Our view is that none of them is reversing.

First, the investable economy has moved increasingly private. Companies that once needed public markets for growth capital can now find abundant private funding, so they stay private far longer. The number of U.S. public companies has fallen by roughly half since the mid-1990s, even as the economy more than doubled in size after inflation. Today, roughly 87% of U.S. companies with revenue above $100 million are private.¹ The same is true of real estate. The vast majority of U.S. commercial property is privately owned, while listed REITs represent a fraction of the investable market. Owning only public markets means owning a smaller and smaller slice of the real economy.

Second, banks stepped back from lending. Regulation after the 2008 financial crisis required banks to hold more capital, take less balance sheet risk, and prove they could survive a downturn. Middle market lending was the easiest business line to shrink, and private credit funds quickly stepped in. Non-bank real estate and asset-backed lending followed, especially after rates shot up and regional banks failed in 2023, pushing many to wind down their books and stop writing new loans. Borrowers and their need for capital didn't disappear. Private credit filled the gap.

Third, this shift isn't new money chasing a trend. Decades ago, large university endowments pioneered portfolio construction that included private investments. Pensions, foundations, family offices, and other pools of institutional capital followed. Many now allocate 30% or more to private markets. They did it for a specific reason: long time horizons let them trade liquidity for a wider set of opportunities.

Fourth, the door opened to private clients. For most of this history, access meant seven-figure minimums, decade-long lockups, and often the right relationships. That has changed. Managers who once raised capital only from institutions now build funds specifically for private wealth. Minimums are lower, some vehicles offer periodic liquidity, and others simplified tax reporting.

What institutions can own and what you can own has never been closer. 

Why This Matters Now:

The four trends explain how we got here. Today's market environment explains the timing.

We remain excited about many segments, themes, and individual stocks across global equities. But this bull market is among the strongest on record, and public equity valuations are elevated relative to their long-term average. Valuation alone is a poor timing tool and says nothing about next quarter or even next year. Historically, though, it has been a reliable forecaster of long-term returns for a simple reason: the more you pay for a dollar of earnings today, the less that dollar should return tomorrow. The Apollo chart below shows that inverse relationship.² The S&P 500 currently trades at 20.0x forward earnings. Using history as a guide, that points to mid-single-digit annualized returns over the next decade.

Concentration compounds the issue. As BlackRock points out, the ten largest companies now make up roughly 37% of the S&P 500, up from 29% in 2020 and 19% in 2010.³ That is the most concentrated the index has been in over half a century. The dominant AI theme has left portfolios riding a single narrative more than most investors realize. The largest names share the same customers, the same suppliers, and the same story, so a broad-based index fund increasingly trades like a stake in one theme.

Finally, our view is that rates are staying higher for longer. In part due to stubborn inflation following successive supply shocks, the rates market keeps pushing out the timeline for meaningful cuts. The next move for the Fed is very likely a rate hike. Long-term yields sit near their highest levels in two decades, with the 10-year Treasury at 4.65%. In public markets, that cuts both ways. It can weigh on equity valuations while finally compensating bondholders. For some alternatives, like private credit and infrastructure, higher rates are a tailwind.

Illiquidity Is the Trade-Off:

Now for the biggest risk. The main thing you give up in the private markets is liquidity. Public stocks and bonds can be sold every day. Most alternatives cannot. Private equity funds can commit capital for 7-10 years, real estate funds for 5-7. Some private market structures allow quarterly redemptions, but those can be gated when you’d least like them to. Structured notes are built to be held to maturity.

This is why alternatives belong in the portion of your portfolio you genuinely won't need for years. We size these allocations deliberately, leaving ample liquid assets for your spending, your reserves, and your peace of mind. If illiquidity would ever force your hand at the wrong moment, we've sized it wrong.

One subtle point deserves a mention. Given their illiquidity, many private assets are valued periodically by appraisal rather than continuously by the market. This makes their reported returns look smoother than the underlying reality. Some of that steadiness is real diversification. Some of it is an accounting effect. The diversification and return benefits are real, but the ride is bumpier than your statements suggest.

Portfolio Construction:

Given these structural changes and today's market environment, some portfolios would benefit from shaving a bit off the 60, a bit off the 40, and funding a diversifying leg of the stool. That could look something like 50% stocks, 30% bonds, and 20% alternatives, spread across private equity, private real estate, private credit, and structured notes.

The logic is the same one that popularized the 60/40 in the first place. Combine assets that move differently, and the whole becomes steadier than the underlying pieces. Blended into a portfolio, alternatives have the potential to lift expected returns, dampen the volatility, or both. From a portfolio construction standpoint, these allocations are not a single bet. They are four distinct roles, each earning its place for different reasons.

Investment Implications:

Private Equity:

The stock market used to be where companies grew up. A young business raised private capital to get off the ground, went public several years later, and public shareholders owned the growth from there. Amazon IPO'd at a $438 million market cap. Public shareholders captured nearly all of the ride to its roughly $3 trillion valuation today. That path has largely changed. The median U.S. company going public is now 12 years old, compared to just 6 years in 2000. By the time a business lists, much of the growth and returns may already be behind it.

SpaceX (SPCX) is an extreme case, but it illustrates the pattern. When SPCX listed in June as the largest IPO in history, it was 24 years old. Valued near $100 billion in late 2021, it priced its IPO at $1.8 trillion and finished its first day of trading above $2 trillion, instantly one of the 10 largest companies on earth. Private shareholders compounded at roughly 85% annually over the five years leading into the IPO.⁴ Public shareholders have had a different experience so far. As of this writing, SPCX trades well below its $135 issue price. The growth went to the private owners, and the hype went to the public.

The result is a stock market that represents a smaller slice of the economy than a generation ago. A rising share of the wealth created by the most exciting, innovative companies now accrues to private shareholders before the public ever gets a seat at the table. Private equity and venture capital are how we take that seat.

Private Real Estate:

Public REITs give you real estate exposure with a stock market personality. They trade daily, and they typically move in lockstep with small cap value equities. Private real estate works differently. It lets us invest alongside best-in-class developers, operators, and acquirers who specialize in particular property types and geographies. A multifamily specialist in high-growth markets. An industrial developer positioned along key logistics corridors. A data center owner riding the AI infrastructure buildout.

Real estate is intensely local and intensely operational. The gap between an average operator and an exceptional one is enormous. Private vehicles are how we access that expertise directly rather than settling for broad, undifferentiated exposure.

Private Credit:

We covered the retreat of the banks above. The investment case is about what being the lender means for returns. Loans are directly negotiated, senior in the capital structure, sometimes secured by assets, and documented with covenants that public bond investors don’t enjoy. And because these loans are originated rather than traded, investors collect a premium over comparable public credit. That premium is compensation for the intense credit work and for giving up liquidity along the way.

The demand side is just as durable as the supply side. The same forces keeping companies private for longer keep them borrowing in the private market. A business with no public equity rarely wants public debt. It wants a lender who can move quickly, structure creatively, and hold the loan to maturity. That is exactly what private credit is built to do, and it is why the market has expanded from middle-market lending into real estate credit and asset-based finance.

Most of these loans carry floating rates. When rates stay high, lenders earn more. The flip side: borrowers pay more in interest, which can pressure their cash flow. That is a reminder that credit risk is real, defaults happen, and there’s a large gap between the best managers and everyone else. Manager selection is not a detail in this space. It’s a big part of the strategy.

Structured Notes:

Long-only equities offer one set of outcomes: full participation on the upside, and full participation on the downside. Structured notes let us change the terms.

A note is an agreement engineered to “structure” a specific return outcome. Often that means a defined layer of equity downside protection, in exchange for a cap or modified participation on the upside. Compared to stocks, a structured note strategy can cushion some of the decline while keeping you invested. Notes also diversify the return profile itself. In a flat or choppy market where long-only equities go nowhere, an income note can still pay its coupon. Structured notes let us shape risk rather than simply accept it. The cherry on top: higher rates and higher equity volatility typically improve the terms and coupons these notes can offer.

Summary:

Moving from 60/40 to something like 50/30/20 is not a rejection of the portfolio that has served investors well. It is an acknowledgment that the investment world has evolved and the sources of returns have broadened. The investors who broadened with it (endowments, pensions, and family offices) have been rewarded.

Private equity captures growth that increasingly happens before companies go public. Private real estate gains access to operators we couldn't otherwise reach. Private credit steps into lending the banks left behind. Structured notes deliver defined outcomes and diversification while maintaining equity market participation.

The cost of admission is liquidity, and it is a real cost. We plan for it with deliberate sizing. Illiquidity also puts a premium on due diligence. When we can't easily sell, we must do everything possible to get it right going in. But for the portion of your portfolio with a long enough time horizon, we believe the trade is a good one.

The question is no longer whether these asset classes belong in portfolios. The question is how much, which strategies, and in which vehicles. Those answers depend on your specific liquidity needs, time horizon, and risk tolerance. Your Diversify Advisor can help you work through them.

David Wrigley

Chief Investment Officer

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1. Source: Apollo and S&P Capital IQ, as of April 2024

2. Source: Apollo, as of June 30, 2026

3. Source: BlackRock, as of March 31, 2026

4. Source: CNBC, implied annualized returns based on secondary tender offers, as of June 12, 2026

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Alternative investments involve risks including illiquidity, valuation uncertainty, and manager-specific risk, and are not suitable for all investors.

The information contained herein is the opinion of the author as of the date the market update was written and is subject to change without notice as markets change, and new information is available. While Diversify utilizes sources deemed to be reliable, we have not independently verified the content. Investors should carefully consider any changes based on this market commentary and discuss their individual circumstances with their trusted advisors. Past performance is not indicative of future results. This communication is for informational purposes only and should not be construed as investment advice or a recommendation.