Larry Fink's New Portfolio: More Fees, More Risk

Larry Fink, the chairman and CEO of BlackRock, has proposed a new portfolio allocation strategy that could revolutionize the way investors think about diversification. In his annual letter, Fink suggested a shift from the traditional 60/40 portfolio of stocks and bonds to a 50/30/20 allocation, with 20% of investments in private assets like real estate, infrastructure, and private credit. While this new strategy promises diversification, inflation protection, and stability, it also comes with a significant drawback: higher fees.

The traditional 60/40 portfolio has been the gold standard for diversification for decades. It offers a balanced mix of growth from stocks and stability from bonds, making it a popular choice for long-term investors. However, Fink argues that this portfolio may no longer be sufficient for diversification in today's economic climate. He proposes that the future standard portfolio should look more like 50/30/20, with a significant allocation to private assets.

Private assets, such as real estate, infrastructure, and private credit, are less correlated with traditional stocks and bonds, making them an attractive option for diversification. They also tend to perform well during periods of inflation, providing a hedge against rising prices. However, these assets come with a catch: they are more expensive to invest in.

BlackRock's iShares Core S&P 500 ETF (IVV) and iShares Core U.S. Aggregate Bond ETF (AGG) have expense ratios of 0.03%, while the iShares Listed Private Equity UCITS ETF has an expense ratio of 0.75%. This represents a 25-fold increase in fees. Quantitative-investing pioneer Richard Ennis, who examined the performance of university endowments that have invested heavily in alternative assets, found that these assets are more expensive. Ennis stated, "What you get with alts is pretty much the same as what you get with stocks and bonds. The main difference is that you pay at least 10 times more for the alts."

The higher fees associated with private assets have significant implications for both the performance and accessibility of the portfolio for individual investors. While Fink's vision is to open up private markets to everyday investors, the increased costs could make these investments less attractive or even unaffordable for many. This could exacerbate the economic divide, where wealthier investors continue to benefit from access to higher-yielding assets, while less affluent investors are left with lower-yielding traditional assets.

Moreover, the higher fees could also lead to a situation where the benefits of diversification and inflation protection offered by private assets are offset by the increased costs. This could result in a net negative impact on the overall performance of the portfolio for individual investors, making the new 50/30/20 allocation less appealing than the traditional 60/40 portfolio.



Fink acknowledges that private assets carry greater risk. Private assets such as real estate, infrastructure, and private credit are less liquid and more volatile compared to publicly traded stocks and bonds. This increased risk, combined with higher fees, could make the new portfolio allocation less attractive for risk-averse investors.

In conclusion, Larry Fink's proposed 50/30/20 portfolio allocation strategy offers potential benefits such as diversification, inflation protection, and stability. However, it also comes with higher costs, greater risk, and increased complexity. Investors considering this new allocation should weigh these factors carefully and ensure they have the resources and expertise to manage the additional risks and costs associated with private assets.