By: Edward J. Leach, CFP®, MBA, CEPA®
Have you ever tried eating raw flour? What about a spoonful of baking powder or a stick of butter? Each one on its own doesn't taste great—but mix them, bake them, and you've got cake. I would say that's an enjoyable experience for someone who likes cake.
The same goes for investing.
Each investment—whether stocks, bonds, or something less familiar like private equity or private real estate—has its own characteristics. Some are sweet, some are bland, and some can leave a bitter taste at the wrong moment. But when you combine them thoughtfully in a diversified portfolio, the result can be a much smoother and more enjoyable experience over time.
Why Diversification Is Like a Recipe
Many investors are familiar with the traditional "60/40" portfolio, 60% stocks and 40% bonds. It's been a go-to mix for decades. But just like how cake recipes evolve to include new ingredients (like almond flour or oat milk), portfolios can also benefit from getting an update occasionally.
For example, adding private market investments—like private equity, private credit, infrastructure, and private real estate—can help create a more balanced "recipe" for your wealth. Each of these ingredients behaves differently from traditional stocks and bonds. That difference can help reduce how much your overall portfolio bounces up and down, especially when public markets get choppy.
Why Private Markets Are Powerful Ingredients
Private markets were once only available to large institutions and ultra-wealthy families. But that's changing. Today, many accredited investors can access private investments through more flexible, user-friendly "Evergreen" structures. These investments have shown the ability over the long term to offer:
Reduced volatility as compared to public markets.
Different sources of return help smooth out the ride.
Access to a larger share of the global economy since most companies and real estate are still private.
Think of it like adding eggs to a cake -- you don't always see what they're doing, but they are essential to holding everything together.
Managing Volatility and the Timing of Returns
Reducing volatility matters because the order of investment returns—the sequence of returns risk—can make or break a long-term plan. This is especially true if you're taking income from your portfolio during retirement. When you're making withdrawals, significant losses early on can do more harm than the same losses occurring later.
That's why, at HIGHLAND, our planning process doesn't stop at portfolio construction. It includes a thoughtful retirement distribution strategy. We help clients set aside short-term income needs in more stable investments so they aren't forced to sell long-term growth assets during market downturns.
By managing volatility through diversification and planning, you reduce the chances of making emotional or poorly timed investment decisions. This can help your money last longer, keep your financial plan on track, and give you greater confidence throughout retirement.
The Bottom Line
Just like a cake needs the right ingredients, a portfolio needs a thoughtful mix of assets to work well. Private markets are no longer exotic ingredients—they're becoming essential for those seeking to reduce volatility, manage risks, and stay on course through all kinds of market environments.
At HIGHLAND, we help clients build portfolios to match their financial goals and tolerance for risk. Whether you're planning for retirement or looking to grow wealth across generations, we're here to help you find the right recipe.
Ed Leach, CFP®, MBA, is a Partner and Wealth Advisor at HIGHLAND Financial Advisors, LLC in Wayne, NJ, and works directly with clients advising them on their financial planning and investments. Ed’s work focuses on the unique needs of business owners, helping them extract value from their businesses while creating efficiencies in their business and personal financial plans. He is also a member of NAPFA, which is dedicated to serving fee-only advisors.
The foregoing content reflects the opinions of Highland Financial Advisors, LLC, and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct.
Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses, which would reduce returns.
Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful or that markets will act as they have in the past.