When constructing an investment portfolio, diversification across non-correlated asset classes is always essential to minimize risk while maximizing returns. Equities and bonds are the usual assets selected for diversification but real estate is often overlooked, despite having a proven track record in achieving favorable returns while reducing investment risk.

In this article, we’ll show how you can achieve that ideal conjunction of benefits in your investment portfolio.


“Every person who invests in well-selected real estate in a growing section of a prosperous community adopts the surest and safest method of becoming independent, for real estate is the basis of wealth.” — Theodore Roosevelt

The death of 60-40

The classic diversification model was the "60-40" portfolio: 60% in equities and 40% in bonds. This structure had been highly successful over the long-term, returning an average of 7.1% annually for the 10 years to end-2021 and 9% per annum for the 100 years to that date.

Then 2022 arrived, a game-changing year. The annualized return for 60-40 collapsed to an annualized loss of 34.4% by the end of October 2022, the worst result in a century, as equities and bonds fell simultaneously, prompting many investors to question the model’s validity.

Annual 60-40 portfolio performance over the last century
Source: Investopedia

Those questions continue to be asked today as resurgent inflation combined with sluggish economies raise the threat of stagflation. Analysts from the International Monetary Fund (IMF) see global worldwide GDP growth slowing to 3% in 2023 and stagnating in 2024, well below the annual average of 3.8% seen from 2000-2019. At the same time, global inflation is projected to stay at the level of 7.7% in 2023 and 6.1% in 2024.

Given this outlook, Le Bijou believes investors should consider adding real estate to their common 60-40 mix.

As the historical data shows, even when returns decline, real estate has been less affected than equities and relatively quick to recover when economies improve. It is, therefore, one of the best ways to protect an investment portfolio from stagflation. In the chart below, note how Swiss annual real estate returns (the light blue line) have been much greater and more stable than those for equities (in dark blue) over the past 15 years. They have even been growing more steadily than those for supposedly safe bonds (orange line).

Comparison of stocks vs. bonds vs. real estate annual returns in Switzerland
Source: TradingView

Besides, people will always need homes, regardless of the state of the economy or the markets, and limited supply helps real estate investors to thrive in almost any environment.

New approaches to asset allocation – an in-depth analysis

In order to determine the effect real estate could have on investment returns and what might be the most appropriate level of allocation, we took the 60-40 model as a base and back-tested variations of it with different real estate mixes.

The results of adding different fractions of real estate to a traditional 60-40 portfolio*

* The calculations were made using the SIX – Swiss Market Index (SMI) as the Swiss stock market, SXI Real Estate® Fnds Broad TR (SWIIT) as the Swiss real estate market, and the SBI® AAA-BBB Total Return (SBR14T) as the Swiss bond market.

New approaches to asset allocation – an in-depth analysis

  • Sharpe ratio analysis

    Research shows that including a real estate allocation of just 10% can significantly improve the return and risk characteristics of your entire portfolio. In particular, as shown in the chart below, the Sharpe ratio, which measures investment returns in the context of their volatility, or risk, increases as the proportion of real estate in the portfolio expands.

    Sharpe ratio as it relates to portfolios with different asset allocations (stocks-bonds-real estate)

    In a classic 60-40 allocation with no real estate, this ratio is 0.15. By switching 10% of the equity weighting into real estate (50-40-10), the ratio improves to 0.20 and continues to improve with further inclusion of real estate in an investment portfolio. Ultimately, with a 40% allocation to real estate, drawn mostly from equities plus 10% from bonds (30-30-40), the Sharpe rises to 0.48, a 3.2x improvement of your portfolio’s risk-adjusted performance from what it was for a traditional 60-40 allocation.

  • Maximum drawdown analysis

    The maximum drawdown (MDD), which quantifies the expected maximum downside risk of an investment portfolio, has also shown encouraging results. In the case of the 60-40 allocation, the maximum drawdown in portfolio quarter returns has been 6.50%. For the 30-30-40 allocation, however, the figure is only 4.44% – 1.46x less – while the lowest one was recorded for the 40-40-20 portfolio – only 3.62%.

    The maximum drawdown of portfolios with different asset allocations (stocks-bonds-real estate)

  • Risk & return analysis

    Speaking of returns, our research also shows that 40-30-30 and 30-30-40 portfolios have provided returns of 131.26% and 132.65% respectively over the past 10 years, compared to 123.35% for the classic 60-40 model.

    The advantage of the modified portfolios is also reflected in the reduced risk in most macroeconomic environments. Compared to a 60-40 allocation, these strategies have reduced the volatility of returns – and therefore their risk - by as much as 142% (for the 30-30-40 allocation compared to traditional 60-40) over the past 10 years.

    Even with just 10% in real estate, the model showed a slightly higher return, but significantly lower risk, for the entire portfolio.

    Real estate risk/return profile based on the quarterly compound return for the past 10 years

    As a result, our three modified portfolio models are shown to provide lower risk, more stable income, and higher potential for capital growth.


The traditional 60-40 portfolio has been generating good returns for investors for decades. Its 2022 collapse might have been an aberration and therefore may yet hold good in the future, but its returns have clearly been inferior to portfolios with an allocation to real estate.

We have shown how real estate, a so-called “hard” asset, can play a pivotal role in an investment portfolio, offering better performance, broader diversification, stable income generation, and the potential for greater wealth accumulation. By including real estate alongside stocks and bonds, investors can create a well-rounded portfolio with reduced risk and more reliable returns.

Even if your portfolio’s value is not sufficient to invest in a suitably diversified selection of properties, you can still include the asset class by investing in real estate investment companies listed on a stock market. Better still, you can take advantage of tailored access to a variety of properties through the fractional ownership model, which has been also used by Le Bijou.

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