A new lens on diversification: The key to modern investment portfolio construction

With heightened market volatility and an evolving global economy, high-net-wealth investment portfolio construction requires reimagined diversification strategies. Ben Smoker explores how blending assets across public and private markets with dynamic portfolio structures can mitigate risks and capture growth, while supporting intergenerational needs.

By Ben Smoker, General Manager, Private Wealth, Commonwealth Private 

The principles of wealth preservation and creation require a different lens now that volatility, geopolitical uncertainty, and rapid technological innovation are significant market drivers.

While core principles never change, traditional investment strategies are being recalibrated to address these structural shifts. For families that are managing multigenerational wealth, the challenge in this environment is how to effectively balance proven investment styles with the agility to harness emerging opportunities.

Through all market cycles, diversification remains the cornerstone of risk management, but the way we look at this concept has changed. Historically, portfolios relied on equities and bonds to offset risks. But the classic 60/40 equity-bond split, with its roots in Harry Markowitz’s Modern Portfolio Theory (1952), is now up for debate.

The theory’s premise that equities and bonds inversely correlate has been tested by low yields, emerging structural market forces and overlapping market cycles. During periods of synchronised volatility, both asset classes have at times moved in tandem, eroding their protective synergy.

Today, true diversification encompasses geography, currency exposure and alternative assets such as infrastructure, commodities, hedge fund strategies and private markets.

While liquidity constraints and valuation opacity are sometimes held up as drawbacks to investing in private markets, innovation helps mitigate concerns like these

Ben Smoker

As we have seen, different asset classes are responding uniquely to macroeconomic conditions. This means that if a portfolio is too concentrated, it is potentially overexposed to sector-specific downturns or geopolitical shocks. By contrast, a modern diversified approach ensures that underperformance in one area does not derail long-term objectives.

This does not mean the 60/40 split is obsolete. Rather, changing market conditions underscore the need for adaptation. Increasingly, portfolios are incorporating alternatives like private equity, real assets, and hedge funds to derive more effective diversity.

In more recent times, the 40/30/30 portfolio structure, comprising equities, bonds, and alternatives, has emerged as a modern iteration. These proportions can offer enhanced diversification while retaining the original philosophy of optimised risk-adjusted returns. Crucially to this equation, access to alternative investments has been democratised, enabling high-net-worth families to take advantage of strategies that were once reserved for institutional investors.

Diversification considerations aside, effective portfolio construction hinges on harmonising long-term strategy with tactical responsiveness. Research shows asset allocation drives around 90 per cent of portfolio returns. So each year we reset our strategic asset allocation, anchoring portfolios to objectives, risk tolerance and time horizons.

Taking into consideration shifts in valuation metrics, macroeconomic indicators and liquidity conditions, these tactical adjustments mean we can be flexible when unforeseen events, geopolitical crises, inflationary spikes or technological disruptions play through markets. The overarching strategy is carefully reviewed and structured to ensure durability through these disruptions.

Against this backdrop, private markets present compelling opportunities for generational wealth builders. With more than 140,000 private companies globally, versus fewer than 19,000 public entities, the scope for selective, high-conviction investments is vast. Private equity, venture capital and infrastructure projects can offer exposure to high-growth sectors and illiquidity premiums, often yielding superior returns compared to public markets.

While liquidity constraints and valuation opacity are sometimes held up as drawbacks to investing in private markets, innovation helps mitigate concerns like these. Evergreen fund structures now provide monthly or quarterly liquidity options, while improved transparency frameworks are enhancing investor confidence. For families with varying time horizons, such structures allow younger generations to capitalise on long-term growth, while preserving liquidity for older family members.

Indeed, the nature of intergenerational portfolios means they need to accommodate divergent risk tolerances and liquidity needs. A 30-year-old may prioritise growth-oriented assets, while a retiree requires income stability. Commonwealth Private’s model portfolios address this through modular design, allowing tailored exposure without compromising the all-weather durability essential for wealth transfer.

Flexibility is vital and portfolios must adapt as families evolve through a variety of life stages, including the launching of new businesses or philanthropic ventures. This dynamic approach ensures alignment with both immediate priorities and legacy ambitions.

While the wealth management landscape is evolving, the requirement to safeguard and build capital across the generations remains the same. We view this as an opportunity to redefine stewardship for a new era.

Resilience lies in adaptability in wealth management. Through strong underlying investment principles coupled with innovation and an eye to the future, families can navigate uncertainty with confidence, securing their legacy while making the most of new horizons.

If you would like to discover how Commonwealth Private’s high-net-wealth investment solutions are different to your usual private wealth offering connect with us on 1300 362 081 or visit commbank.com.au/advantage

The article provides general information and has been prepared without taking into account any of your objectives, financial situation, or needs. You should consider whether the information in this article is appropriate for you before you act on the information. Eligibility criteria applies. Investment carries risk. No liability is accepted by Commonwealth Private, its related entities, agents and employees for any loss arising from reliance on its content. Commonwealth Private Limited ABN 30 125 238 039 AFSL 314018 (Commonwealth Private), a wholly owned non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL and Australian Credit Licence 234945 (Commonwealth Bank). Private Bankers are representatives of Commonwealth Bank and Investment Directors are representatives of Commonwealth Private.

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