Risk, Returns, and Wealth Creation: Insights from Private Market Investments

In recent history, institutional investors have increased allocations to alternative assets in an effort to boost portfolio returns. The attention is now turning to individual investors. Significant partnerships, private platforms, and organizations have emerged to democratize access to alternative investments. In 2021, the US Department of Labor also took a position, suggesting that it might be prudent to include private equity in individual retirement accounts, such as in 401(k) and 403(b) plans. While institutional investors have decades of experience investing in alternative assets, the vast majority of individual investors do not. Consequently, relatively little is known about optimal alternative asset allocations for individual investors. This article presents historical risk and return characteristics from private investments including venture capital, private equity, private credit, and real estate, and constructs portfolios building on a traditional 60/40 (public equity/public debt) allocation, with varying levels of a private markets index, to examine portfolio risk and return trade-offs. Findings reveal that there are portfolio benefits to both returns and risk from adding a significant allocation to alternative investments and that wealth impacts can be sizable over time.