The Patient Investor

Considering Private Debt in Diversified Portfolios

Let’s set the stage by discussing how we think about portfolio construction and why we often look beyond traditional stocks and bonds in an attempt to build more robust client portfolios. Most of our clients' primary objective is to improve their odds of meeting their financial goals, such as retirement. We believe broad diversification helps portfolios because the more asset classes and strategies that provide positive returns over time and diversify one another, the more predictable the portfolio’s range of returns. Furthermore, the more independently each asset class moves related to one another, the closer the correlation is to zero, and the more positive its diversification benefits. The end result of a broadly diversified portfolio is that it should experience a smoother ride over the long run.  Carl Richards of Behavior Gap does a nice job of simplifying this concept through the image.

The Allodium Investment Committee analyzes our recommended asset classes, strategies and portfolios eachyear. One newer asset class we’ve been evaluating is known as private debt. Without going into the specifics of any specific fund, let’s cover the basics of this asset class and why it is garnering attention.

What is Private Debt?

Private debt (also known as private credit) is comprised of direct loans made to U.S. middle-market companies bynonbank lenders. Borrowers typically have annual profits in the $10-100 million range and are similar in size to small and mid-cap companies in publicly traded equity markets.[1] The word “private” refers to the fact that these loans are not publicly tradeable and are meant to be held to maturity.  As a result, lenders are rewarded by an illiquidity premium that results in higher yields than most traditional bonds.

Direct loans have been a rapidly growing area of the investment universe in recent years, and direct lending increased 250% from its $400 billion size in 2019.  Larry Swedroe, Director of Research for The BAM Alliance, explained in a recent blog, “The enactment of the Dodd-Frank Act in 2010 made it increasingly expensive for small banks to operate, cutting off their supply of loans to small and mid-sized companies. As a result, private debt funds stepped in to fill the gap.” [2]

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The Patient Investor

What Does a Strong Dollar Mean for the U.S. Economy?

In late September 2022, the U.S. dollar hit a 20-year high in an index that measures its value against six major currencies: the euro, the Japanese yen, the British pound, the Canadian dollar, the Swedish krona, and the Swiss franc. At the same time, a broader inflation-adjusted index that captures a basket of 26 foreign currencies reached its highest level since 1985. Both indexes eased slightly but remained near their highs in October.[1–2] Intuitively, it might seem that a strong dollar is good for the U.S. economy, but the effects are mixed in the context of other domestic and global pressures.

World Standard

The U.S. dollar is the world's reserve currency. About 40% of global financial transactions are executed in
dollars, with or without U.S. involvement.[3] As such, foreign governments, global financial institutions, and multinational companies all hold dollars, providing a level of demand regardless of other forces.

Demand for the dollar tends to increase during difficult times as investors seek stability and security. Despite
high inflation and recession predictions, the U.S. economy remains the strongest in the world.[4] Other countries are battling inflation, too, and the strong dollar is making their battles more difficult. The United States recovered more quickly from the pandemic recession, putting it in a better position to weather inflationary pressures.

The Federal Reserve's aggressive policy to combat inflation by raising interest rates has driven demand for the dollar even higher because of the appealing rates on dollar-denominated assets such as U.S. Treasury securities.

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The Patient Investor

Evidence-Based Investing

How do you invest your money over the long-term? If you’ve read much of our work, you’ve probably noticed we embrace evidence-based investing. But what does that mean?

What is Evidence-Based Investing?

Evidence-based investors build and manage their portfolio based on what is expected to enhance future returns and/or dampen related risk exposures, according to the most robust evidence available. This also means sticking with your long-view, evidence-based strategy once it’s in place, despite the market’s uncertainties and your own self-doubts you’ll encounter along the way.

Evidence-Based Investing, Applied

Do you hope …

  1. Investors can come out ahead by finding mispriced stocks, bonds, and other trading opportunities; and/or by dodging in and out of rising and falling markets?

Or do you accept …

  1. The market’s rapid-fire trading creates relatively efficient pricing that is too random to consistently predict?

There is an overwhelming body of evidence suggesting investors should skip the first approach and act on the second assumption. This has been the case since at least 1952, when Harry Markowitz published Portfolio Selection in The Journal of Finance. In their book, “In Pursuit of the Perfect Portfolio,” professors Andrew Lo and Stephen Foerster describe:

“While it’s commonplace now to think of creating a diversified portfolio rather than investing in a collection of securities that each on their own look promising, that wasn’t always the case. It was Harry Markowitz who provided a theory and a process to the notion of diversification. He helped to create the industry of portfolio management.”

Markowitz’s work became known as Modern Portfolio Theory (MPT). Academics and practitioners have been building on it ever since. His initial work and others’ subsequent findings strongly support ignoring all the near-term noise and taking a long-view approach.

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The Patient Investor

What Is Interest Rate Risk and Why Should We Care?

Let’s look at interest rate risk. However, before we can fully understand it, we need to set the stage for where we are currently, as it provides an important perspective on why this matters today. Many people have encountered a falling interest rate in their investment experience.

As you can see in the chart below from the Federal Reserve1, the Ten-year Treasury interest rate began falling in the early 1980s, when it peaked at over 15%. While there have been minor upticks over the last 38 years, the overall trend has been downward. You may also note that the 10-year Treasury yield hit an all-time low thus far of 0.32% in March of 2020 and has been moving higher since that time.

Source:, May 10, 2021

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The Patient Investor

Why Invest When The Stock Market Is At An All Time High?

Over the last two decades, the U.S. stock market has repeatedly been making new highs. As a result, this has been a relatively common question that I’ve heard from clients throughout my career. For a client with money to invest, it’s a natural one to ask…”if the market is at an all-time high, why should I invest now?“ And this question is relevant today. On February 19, 2020, the S&P 500 index hit an all-time high, closing at 3,386 as part of a historic bull run that began on March 9, 2009. After a dramatic drop of 34% in March due to the COVID-19 pandemic, the U.S. stock market quickly recovered and the S&P 500 made a new all time-high on August 18, 2020.1   

Clients now are wondering if they’ve already missed the rally or would be better off waiting for a pullback to invest. Or, if they are already invested, they may be considering whether they should sell a portion of their portfolio ahead of a potential downturn. If we drill a bit deeper, “loss aversion” is often the fear behind these thoughts, summarized in the concern of “what if I invest today and I lose money tomorrow?”

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