What’s in this article?

• What is a goals-based approach to asset allocation?
• What are the key client goals?
• What roles can alternative investments play?
• How should investors think about liquidity
• How can a goals-based portfolio come together?
• The bottom line

What is a goals-based approach to asset allocation?

Portfolio construction is often framed as a split between traditional assets and alternatives, with the discussion centered on how much to allocate to alternatives. But, there is another approach. A goals-based framework flips that logic, starting with what the portfolio needs to achieve, working backward to the most effective allocation mix.

In this piece, we’ll review the goals-based approach, the roles alternative investments can play in a portfolio, understanding liquidity factors, and putting it all together. 

What are the key client goals?

Client goals can be sorted into three key buckets:

In a goals-based approach, alternative investments can be used across all three of these bucketed groups, diversifying the sources of return by goal, instead of diversifying by public versus private markets. 

As the below graphic demonstrates, there are alternative and traditional investments in all three goals buckets. This approach enables portfolio construction that allows for broader diversification, expands potential sources of return, and distinguishes between goals, rather than simply splitting ‘traditional and alternative’.

What roles can alternative investments play?

The word alternative is used a lot in the asset management industry, with little explanation on what differentiates the strategies. The table below shows four kinds of alternatives, their differentiating factors in generating returns for clients, making them alternative.

How should investors think about liquidity?

The next phase of the approach is to ensure that the portfolio is aligned with client liquidity needs. Where liquidity is less essential for clients, they should expect greater returns for less liquid approaches. 

Historically, public equity and private credit outperformed liquid credit.² Our outlook is that private strategies should outperform public equities and credit (over a cycle) by 1-3%. Today’s market backdrop appears to make this possible. 

How can a goals-based portfolio come together?

The combination of a goals-based asset allocation with the differentiating factors of alternative investments allows for simpler portfolio construction that broadens return drivers and aligns capital with client time horizons.

This sample allocation model demonstrates how, rather than treating alternatives as a standalone allocation, each strategy can serve a defined role within the portfolio.

Liquidity budgeting ensures these allocations are intentional. Illiquidity can be a feature when aligned with long-term capital, but sizing discipline is essential to preserve flexibility and rebalancing capacity.

The bottom line

When risk is allocated by objective rather than by asset label, alternatives become structural tools – not add-ons – improving diversification and outcome alignment without increasing complexity.

A disciplined goals-based framework, combined with intentional liquidity budgeting, allows advisors to integrate public and private markets with greater precision – aligning capital to time horizon, return needs, and risk tolerance.

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Footnotes

1. Source: US Census Bureau – Statistics of US Businesses database as of December 2023, which represents latest data available through 2021. Public company count is from the World Federation of Exchanges database as of June 2024.

2. Historically, public equities and private credit have outperformed liquid credit over long horizons. For example, in the Cliffwater Direct Lending Index (CDLI) Q3 2023 report (data from Sep 2004–Sep 2023), private credit (CDLI) delivered 9.31% annualized since inception versus public liquid credit benchmarks: Bloomberg High Yield Bond Index 5.97%, Morningstar LSTA US Leveraged Loan Index 4.37%, and Bloomberg Aggregate Bond Index 2.98%.

Over the same report’s 10-year window, CDLI returned 8.89% annualized versus High Yield 4.02%, Leveraged Loans 3.65%, and Aggregate Bonds 1.06%.

For public equities vs. bonds, the Credit Suisse Global Investment Returns Yearbook (DMS database) shows equities were the best-performing asset class over the long run; for the USA (1900–2022) it reports annualized real returns of 6.4% for equities vs 1.7% for bonds (and 0.4% for bills).

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