Why a 90/10 portfolio may be better than 60/40 for some investors

A recent opinion piece in The Wall Street Journal is questioning the financial planning bedrock of the 60/40 portfolio, suggesting that for wealthy investors, a far more aggressive 90% allocation to equities could be the superior long-term strategy. This approach prioritizes long-term wealth creation over the traditional model’s emphasis on balancing growth with capital preservation through a heavy bond allocation.

"I am very sorry that Finsbury Growth and Income Trust's portfolio strategy has turned out to be so inappropriate for market conditions over the past two to three years,” said Nick Train, manager of the trust, highlighting the psychological difficulty of a high-equity strategy. Despite the fund falling 10.1% over three years against a 45.9% gain for the FTSE All-Share, Train is holding firm, betting on the long-term value of his concentrated equity positions.

The core of the 90/10 argument rests on the historical outperformance of equities over long time horizons. While a 90% equity portfolio would experience greater volatility, proponents argue that for investors with sufficient capital to ride out market downturns without forced selling, the potential for compound growth far outweighs the risk. For instance, the Silver Beech Capital fund has generated a 16.4% compound annual return since 2021, outpacing the S&P 500’s 12.4% by focusing on undervalued companies.

This debate forces a critical question for high-net-worth individuals: is the primary goal to preserve capital or to aggressively grow it? The 90/10 framework suggests that for those whose lifestyle is not dependent on their portfolio, the larger risk is not volatility, but rather the opportunity cost of holding too much in lower-returning bonds over multiple decades.

The Role of Bonds in a Modern Portfolio

The argument for a 90% equity allocation does not render bonds obsolete but rather reframes their role from a core holding to a tactical tool for specific, time-bound goals. A case study highlighted by LiveMint illustrates this perfectly: a 38-year-old professional, Mr. Awasthi, earmarked Rs. 30 lakhs (30% of his portfolio) for corporate bonds with a three-year timeline for a home purchase.

This strategy allows him to shield the capital for his near-term goal from equity market volatility while still generating a significant return, with the bonds yielding an average of 11% per annum. The remaining Rs. 70 lakhs of his portfolio stays in equities and precious metals for long-term growth. This goal-based segmentation demonstrates a sophisticated approach where bonds provide stability for a defined purpose, rather than acting as a permanent drag on the entire portfolio's potential return.

The Psychological Challenge of a 90% Equity Allocation

Sticking with a high-equity portfolio during periods of underperformance is one of the greatest challenges for investors. Fund manager Nick Train’s recent apology to shareholders is a stark reminder of this reality. His Finsbury Growth & Income trust, heavily tilted towards consumer franchises and digital data businesses like London Stock Exchange Group (LSEG) and Relx, has lagged its benchmark significantly.

Yet, Train argues that selling now would "crystallise losses" and that the depressed valuations have begun to attract corporate activity, a sign of underlying value. He believes his holdings, which have proprietary datasets, are poised to be beneficiaries of artificial intelligence, not victims. This illustrates the conviction required for a 90/10 strategy; investors must be willing to endure multi-year periods of poor performance and trust their long-term thesis, a feat that is psychologically and professionally demanding.

Beyond Public Equities: The Private Credit Alternative

The discussion of a 90/10 portfolio often simplifies "equity" to mean public stocks. However, sophisticated investors are increasingly allocating capital to alternative, equity-like assets such as private credit. Silver Beech Capital’s recent investor letter details a large position in Apollo Global Management (APO), a firm that exemplifies this trend.

Apollo has pioneered a model that integrates a massive life insurer, Athene, with an alternative asset manager. Athene provides over $440 billion in permanent, long-duration capital from annuities, which Apollo’s asset manager then deploys into private credit deals, capturing returns that have historically outpaced public markets. Since its inception, Apollo's private equity arm has generated a 24% net internal rate of return. This structure allows Apollo to "eat its own cooking" on a scale its peers cannot match, creating a powerful, self-reinforcing growth engine. For investors in a 90/10 portfolio, allocating a portion of the "90" to firms like Apollo or their funds offers a way to access high-growth, equity-like returns outside of the traditional stock market.

This article is for informational purposes only and does not constitute investment advice.