Sixteen years ago, I entered the markets in earnest for the first time. Not as a professional (that came later) but as a student at Frankfurt School who wanted to understand how capital allocation works in practice. What followed was the global financial crisis. Not a bad starting point, in retrospect: you learn more about drawdowns, liquidity crises, and correlation breakdowns in a single year than in ten years of textbook study.
Sixteen years later (through the Eurozone debt crisis of 2011, through COVID in 2020, through the inflation regime of 2022, through the credit fragility that is manifesting in 2025) one conviction has remained constant. Portfolios that held through all of these cycles had one thing in common. They thought in four functions, not in two asset classes.
This memo explains what I mean by that.
The mental model that still shapes most portfolios
60/40. Sixty percent Public Equities, forty percent Fixed Income. For decades this was the standard architecture for private portfolios, and it had a clear internal logic. Equities grow. Bonds stabilize. And when equities fall, bonds typically rise: in risk-aversion episodes, capital flows into safe government securities and drives their prices higher. The negative correlation between the two building blocks protects the overall portfolio exactly when it comes under greatest pressure.
That logic was not wrong. It was, however, regime-dependent, and that distinction matters enormously.
The negative correlation between equities and bonds holds under specific macroeconomic conditions: moderate growth, moderate inflation, central banks able to respond to growth shocks by cutting rates. When growth weakens, rates fall, bond prices rise, and the 60/40 portfolio rebalances itself. This worked so consistently through the decades following the inflation peak of the early 1980s that it took on the appearance of a structural truth. It was, in reality, a regime.
2022 showed what happens when the regime changes.
In the calendar year 2022, global equity markets lost substantial value. That alone is not unusual (drawdowns belong to the nature of equities). What made 2022 historically significant was that global bond indices suffered one of their worst declines in generations in the same period. The causality was straightforward: inflation at its highest level in decades forced a series of aggressive rate increases by central banks. Rising rates mean falling bond prices. The two building blocks of the classic portfolio (growth and stability) failed simultaneously. By various market analyses, it was the worst calendar year for a classic 60/40 portfolio since the Great Depression.
I do not say this to induce fear or to make a forecast. I say it because it raises a structural question that deserves to be asked plainly: if the two functions that a 60/40 portfolio occupies fail simultaneously, which functions take over the work? That is not a rhetorical question. It has a concrete answer. And the answer reveals what is missing from most private portfolios.
A portfolio is a job description for capital
Four functions a portfolio must serve. Growth: preserving and increasing real wealth over long time horizons. Stability: delivering regular, predictable income and acting as an anchor during volatile periods. Diversification: gaining access to risk premia that are structurally low-correlated with public markets. Optionality: preserving the capacity to act when others are forced to act.
Four building blocks serve these functions: Equities. Fixed Income. Alternatives. Liquidity.
This is not a reinvention. Institutional allocators have thought in this logic for decades. What has changed is the accessibility of certain building blocks for private investors, and the urgency of the question, after 2022 made the weakness of the two-block architecture so plainly visible.
Block I: Equities, long-term growth
Equities are the growth engine. That is their function, and nothing fundamental about that has changed. What is worth questioning, however, is which equities a portfolio holds, and in particular, in what geographic distribution.
In German private portfolios I have observed a consistent pattern over many years: a pronounced home bias. The DAX is what feels familiar. Europe is what feels accessible. Global allocation is often treated as a supplement rather than a starting point. That is understandable (familiar companies create a sense of being informed) but it produces a geographic concentration risk that is not structurally justified from a portfolio standpoint.
Institutional allocation inverts this approach. The starting point is global, structured regionally and sectorally according to growth potential, valuation parameters, and economic cycles, not according to familiarity. Germany is an excellent economic location. A portfolio that is structurally overweight in German or European securities nonetheless carries a concentration risk that could be reduced through broader diversification without sacrificing the growth expectation of the Equities block.
Within the block, the growth-versus-value question also merits attention. Over sixteen years I have lived through periods where value strategies clearly dominated, and periods where growth eclipsed every other style. What this experience has given me is a specific caution: both styles have their windows. The decision about where within the equity spectrum to allocate should be driven by an assessment of the valuation environment, not by habitual conviction in one style.
Block II: Fixed Income, stability and income
Fixed Income is not equal to Fixed Income. That sentence sounds simple, but its implications are systematically underestimated in private portfolios.
The typical approach in German retail portfolios: one Bund-heavy bond ETF. The Fixed Income position is thereby considered "done." In practice, this is an implicit duration bet with a credit risk profile determined by the ETF composition, both without explicit decision by the investor. The result is a building block that performs as hoped in the best case, and the opposite in the worst, as 2022 demonstrated, when long duration in a rate-hiking cycle was precisely the exposure one did not want to hold.
Fixed Income at institutional standard means something different. It means a maturity structure constructed as a ladder: short maturities for capital preservation and reinvestment flexibility, medium maturities for stable and predictable income, long maturities for deliberate Duration exposure when that is consciously sought and justifiable within the context of the overall portfolio. Duration is a parameter that is actively set, not an inherited characteristic of an ETF basket.
To that comes the issuer mix. Government bonds for quality and liquidity. Investment-grade corporate bonds for the yield spread over governments at still-acceptable credit risk. Pfandbriefe as a German instrument with an excellent risk profile and historically stable performance. Optionally inflation-linked bonds when the inflation regime justifies them. This is not complexity for its own sake, it is the execution of what Fixed Income is meant to accomplish.
One point deserves particular emphasis, because it is especially frequently confused in the German market: Tagesgeld (overnight deposit) is not Fixed Income. Tagesgeld is Liquidity. Both have their place in a well-structured portfolio, but they serve different functions and cannot be offset against one another. Someone who holds their "Fixed Income allocation" in overnight deposits does not have a Fixed Income block. They have an enlarged Liquidity block, and an unintended gap in the stabilization function of their portfolio. This confusion emerged during the zero-rate era, when overnight deposits and short-term bonds were functionally almost indistinguishable. With normalized interest rates, the distinction has become sharp again.
Block III: Alternatives, diversification and access to non-public risk premia
Alternatives is the block most frequently misunderstood, and the one whose accessibility for private investors has changed most meaningfully in recent years.
The function of the Alternatives block is diversification: access to risk premia that are structurally low-correlated with public equity and Fixed Income markets. Private Equity and Pre-IPO stakes. Infrastructure. Real estate beyond direct ownership. Hedge funds with clearly defined strategy profiles. Commodities. The range is broad, the characteristics of individual instruments differ, and not every instrument does the same job in every portfolio.
Since January 2024, European Long-Term Investment Funds in their reformed version (ELTIF 2.0) have been in force. The updated regulation reduced minimum investment thresholds, expanded the permissible product range, and substantially simplified distribution to retail investors. This is a genuine structural shift: access to asset classes previously reserved for institutional or very wealthy investors has been opened to a considerably broader group of allocators.
What ELTIF 2.0 has not changed is the fundamental analytical question, and this is the point most frequently absent from discussions about ELTIF products: what is actually inside the structure? An ELTIF wrapper does not automatically make a product an effective Alternatives block. There are ELTIF-structured products whose underlying exposures are strongly correlated with public markets. That means these products lose value in a downturn scenario at precisely the moment when the Equities book is already under pressure, and thereby fail to deliver the diversification function for which the Alternatives block is intended.
The wrapper is not what matters. The question that must be asked is: which risk premia do I actually own, and are they structurally correlated with what I already hold in my Equities and Fixed Income blocks? An Alternatives block that shows the same losses as the Equities book under stress is not a diversification block. It is a hidden Equities block with less liquidity and higher costs.
Block IV: Liquidity, optionality
Liquidity is the block most frequently dismissed as a drag. The argument sounds rational: uninvested capital earns no return. Cash drag. Inefficiency. The goal, then, should be to remain fully invested at all times.
This logic contains an error that only becomes visible in a crisis.
Institutional portfolios structurally maintain five to fifteen percent in liquid reserves, not from risk aversion, but for strategic reasons. The core reasoning is not complicated: forced selling during a drawdown is the most expensive transaction a portfolio can execute. Someone who must sell because they have no Liquidity sells what is available, not what should strategically be sold. They realize losses at exactly the moment when valuations are least attractive and buying opportunities are in fact forming.
Liquidity gives a portfolio the capacity to act when others are forced to act. In a market dislocation, those who can buy, buy, not those who wish to. Someone who held Liquidity in 2022 could allocate into changed valuation environments. Someone who was fully invested experienced only the drawdown and had no options available to them. The option value of this capacity cannot be precisely quantified, it is nonetheless real, recurring, and structurally underestimated.
Liquidity is not a passive position. It is actively held optionality.
Why the two missing blocks are missing exactly when they are needed
The central irony of the 60/40 problem is structural: the two functions that the classic portfolio leaves unoccupied (diversification and optionality) are precisely the functions one needs when the two it does occupy fail simultaneously.
2022 was that scenario. Growth and stability failed together. Those who held Alternatives that were structurally low-correlated with public markets had a buffer. Those who held Liquidity had the capacity to act rather than merely react. Those who had neither Alternatives nor Liquidity stood under pressure in every dimension simultaneously, and had no options with which to respond.
I write this not as crisis prophecy. The structure of a portfolio is not a prediction. It is a preparation. The next time growth and stability fail simultaneously (and there will be a next time, because regimes change, because correlations shift, and because the conditions that sustain an investment heuristic are not permanent) it will be too late to add missing building blocks. Structural resilience is built before the event, not during it.
The personal arc
Sixteen years of market work (from first positions at Frankfurt School through the global financial crisis, through the Eurozone debt crisis, through COVID, through 2022, and into the challenging credit environment of 2025) have given me a conviction that has only solidified with each cycle: it is not cycles that permanently damage portfolios. It is missing structure that turns a normal market cycle into an avoidable capital event.
Portfolios that had all four building blocks preserved capital. Portfolios that had only two lost capital they did not need to lose. That is not a statement about return optimization. It is a statement about architecture.
At Kronfeld Kapital I have worked with this four-block framework since the founding in 2020, not because it is a guarantee, which no structure can offer, but because it asks the right questions. What job does this capital do? Is every function occupied? If Equities and Fixed Income fail simultaneously, what holds?
The conclusion
A portfolio is a job description for capital. If you have only two job descriptions (growth and stability) two functions remain unoccupied: diversification and optionality.
The problem with unoccupied functions is not that they reveal themselves daily. They reveal themselves when the occupied functions fail simultaneously, at precisely the moment when time and room to maneuver are most limited.
2022 showed that. At some point another year will show it again, under different conditions, from different causes, with different forms of pressure. The question is not whether that happens. The question is whether a portfolio has four building blocks when it does, or two.