Is Your Portfolio Missing This Key Ingredient?

As portfolios limited to public equities capture a smaller slice of corporate growth, private investments are increasingly finding a place in long-term wealth-building strategies, including 401(k)s. When you purchase through links on our site, we may earn an affiliate commission. Here’s how it works. Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.You are now subscribedYour newsletter sign-up was successfulWant to add more newsletters?Delivered dailyKiplinger TodayProfit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more delivered daily. 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For decades, building wealth meant buying stocks and bonds, preferably diversified and held for the long term. That advice still holds.But investors are asking a new question: Is a portfolio made up only of public markets enough?From pension funds and endowments to high-net-worth investors and, potentially, retirement savers in 401(k)s — private assets are moving from the sidelines toward the mainstream.Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special IssuesProfit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.Profit and prosper with the best of expert advice - straight to your e-mail.In the late 1990s, more than 8,000 companies traded on U.S. exchanges. Today, that figure is closer to 4,000 to 4,700 — a roughly 50% decline.The drop isn't because American entrepreneurship has slowed. It's because companies stay private longer, backed by deep pools of private capital that lighten the pressure to list publicly.For investors, that shift matters. A portfolio limited to public equities now captures a smaller slice of corporate growth than it once did.Globally, the imbalance is even starker. There are 25 times more private, private-equity (PE) or venture capital (VC), backed companies than public businesses, yet PE and VC together represent only 12% of the capitalization of global public-equity markets.About Adviser IntelThe author of this article is a participant in Kiplinger's Adviser Intel program, a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.The shift extends well beyond equity. Private credit has stepped in where banks pulled back, private real estate includes institutional assets that rarely trade publicly, and infrastructure — from data centers to renewables — is increasingly financed through long-term private capital.Today's retirement landscape looks very different than it did a generation ago.As traditional pension plans have been replaced by 401(k)-style retirement plans, access to private investments has changed, as well. Pension plans often invested 15% to 25% of their assets in private markets such as private equity and real estate. In contrast, most 401(k) plans today invest less than 2% in these types of assets.That may be starting to change. Target-date funds (TDFs), the "set it and forget it" investment options many people use in their 401(k) plans, now represent more than $3.5 trillion in assets. About $115 billion of that total includes some exposure to private equity (PDF) or private real estate, and the amount continues to grow.Private assets behave differently than public assets. They involve less liquidity, more complex fee structures, wider dispersion between top and bottom managers and valuation lags that can smooth, but not eliminate volatility.New structures such as evergreen funds, semi-liquid vehicles and professionally managed TDFs are making private assets operationally feasible.For most investors, private assets work best as part of a diversified portfolio, accessed through experienced managers and sized appropriately for long-term goals.Private assets are not a single category. Each plays a different role in portfolios and has grown relative to its public counterpart.Private equity. Private equity and venture capital totaled slightly more than $11 trillion in assets under management at the end of 2023, compared with more than $87 trillion in global public-equity market capitalization.While smaller in aggregate size, private markets back significantly more companies, meaning investors focused solely on public markets may miss earlier-stage value creation as companies remain private for longer.Private credit. Private credit now represents 7% of U.S. debt outstanding and more than 20% of total U.S. credit markets when non-bank sourced lending is included.Its structure differs from traditional bank lending and public debt markets, often offering higher yields alongside trade-offs such as lower liquidity and more complex structures.Looking for expert tips to grow and preserve your wealth? Sign up for Adviser Intel, our free, twice-weekly newsletter.Private real estate. The professionally managed global real estate market is valued at $13 trillion, while public real estate investment trusts (REITs) represent only about $2 trillion of U.S. real estate holdings.In other words, most institutional real estate remains privately held, not publicly traded.Private real estate may show lower volatility and less correlation to stocks vs public REITs — though valuations move more slowly, often due to lower transaction volume.Infrastructure. Similarly, most infrastructure assets — including airports, toll roads, renewable energy projects and data centers — are financed through private markets rather than public equities.Institutional investors often allocate to private infrastructure for its long-term contracted cash flows and potential inflation linkage, recognizing differences in liquidity compared to listed infrastructure companies.Investors aren't turning to private assets because public markets no longer work. They're doing so because public markets no longer capture the whole economy.Think of it this way: What if you needed specific ingredients for your favorite meal? When you went to the grocery store, you found half the aisles were not accessible. There is no way you could get all the ingredients you need.This is what public-only investing feels like — inaccessibility to key ingredients.With more economic growth occurring outside public markets, portfolios built solely from public stocks and bonds may miss meaningful sources of return and diversification.Private equity, private credit, private real estate and infrastructure are no longer viewed as "alternatives" by institutions — and they're increasingly finding a place in long-term wealth-building strategies, including 401(k)s.With millions of Americans depending on 401(k)s for retirement, it's critical to thoughtfully strengthen the system to support long-term financial security.This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.Mike Dullaghan is Director of Retirement Sales Execution for Franklin Templeton, joining via the Putnam integration in 2024. He is responsible for promoting new content, providing thought leadership and delivering the tools and resources that enable the Retirement team to effectively sell Franklin products. Mike collaborates and coordinates across multiple business lines, including US Marketing, Distribution Enablement, Public Market Investments, Distribution Intelligence and Retirement. Previously at Putnam, he was the Director of Content and Sales Enablement for Putnam’s DCIO Team.