Investing in private credit presents an interesting question for followers of the Jack Bogle investment philosophy. While a Boglehead traditionally focuses on low-cost index funds and publicly traded securities, private credit exists outside this familiar territory. This asset class, which includes direct lending and other non-bank financing, has gained attention for potentially higher yields in today’s market.
Most Bogleheads would approach private credit with extreme caution, if at all, recognizing that its complexity and (relatively) high fees contradict core Boglehead principles of simplicity and cost-efficiency. If you’re determined to explore this space, you might consider options like PRIV, which combines public and private credit in one ETF, though these hybrid vehicles still pose challenges to the Boglehead philosophy due to their active managed nature and relatively higher fees, more on this below.
Before venturing into private credit, you should carefully evaluate whether these investments truly belong in your portfolio. Many experienced Bogleheads believe that while private debt may be useful for some investors, the additional complexity rarely justifies the potential benefits for average investors committed to the time-tested strategy of broad market index investing.
Understanding Private Credit
Private credit has emerged as an alternative investment option for investors seeking higher yields in today’s challenging interest rate environment. This asset class offers unique characteristics that differentiate it from traditional fixed-income investments that could compliment your portfolio as the public market experiences volatility.
Defining Private Credit
Private credit refers to directly originated debt investments that are not traded on public markets. These loans are typically made to mid-sized companies that may not have access to traditional bank financing or public debt markets. Unlike publicly traded bonds, private credit investments are generally illiquid and held until maturity. The loan terms are customized and negotiated directly between the lender and borrower.
Private credit spans various strategies across the capital structure, including senior secured loans, mezzanine financing, and distressed debt. Each strategy offers different risk-return profiles to match your investment objectives. Private credit investments may offer the potential for higher yields compared to traditional fixed-income assets, often with additional investor protections through negotiated terms and covenants.
Private Credit vs. Public Debt Markets
The key distinction between private and public debt lies in how they are originated, structured, and held. Public debt trades on exchanges with market-determined prices, while private credit remains unlisted with values determined by the lender.
Private credit typically features floating interest rates that adjust with market conditions, providing some protection against inflation and rising rates. This contrasts with many bond funds that may suffer price declines when interest rates rise. There are typically more complex credit structures and deals made in the private credit space which differ from the simplicity of public market bonds.
The performance of private credit has historically shown lower volatility than high-yield bonds, partly due to less mark-to-market pricing. However, this comes with reduced liquidity as your capital may be locked up for several years.
Boglehead Investment Philosophy
The Boglehead philosophy centers on straightforward, low-cost investing principles designed to build wealth reliably over time without unnecessary complexity or excessive fees. This approach emphasizes passive investing through index funds while maintaining broad diversification. Private credit as an asset class (currently) disagrees with the fundamentals of Boglehead investing.
Tenets of Boglehead Strategy
Bogleheads follow a set of core principles established by Vanguard founder John Bogle. The philosophy prioritizes long-term investing over market timing or active trading. You should focus on controlling what you can – costs, diversification, and your own behavior – rather than trying to beat the market. Bogleheads value simplicity, considering investing as “one less thing you have to worry about in life.”
The strategy includes maintaining proper asset allocation based on your risk tolerance and time horizon. Regular rebalancing keeps your portfolio aligned with your goals while minimizing emotional decision-making during market fluctuations. This disciplined approach works best when you stay the course through market cycles rather than chasing performance.
Role of Low-Cost Index Funds
Index funds form the cornerstone of the Boglehead strategy, offering broad market exposure at minimal cost. These funds track entire market segments without attempting to outperform them.
By eliminating active management fees, you keep more of your returns over time. The Bogleheads investment philosophy specifically promotes “low-cost, do-it-yourself investing using nearly-free index funds” like those offered by Vanguard.
Cost efficiency matters tremendously in long-term investing. Even small differences in expense ratios compound dramatically over decades. When considering private credit investments, you should apply the same cost-conscious scrutiny.
Total market index funds provide inherent diversification across hundreds or thousands of securities, reducing company-specific risk without additional effort or expense.
David Swensen’s Influence
David Swensen, Yale’s legendary endowment manager, significantly influenced Boglehead thinking through his book “Unconventional Success.” His approach for individual investors aligns with many Boglehead principles.
Swensen advocated for a simple portfolio of low-cost index funds for retail investors, despite using alternative investments for Yale’s endowment. He emphasized that individual investors lack the resources, access, and time horizon of institutional investors.
It is relevant to know that Swensen cautioned against private investments for most individuals. When evaluating private credit, consider his warning that retail investors typically have access only to lower-quality or higher-cost opportunities than institutional investors. For most investors with less than $10 million in assets, Swensen would likely recommend staying with public markets through index funds rather than pursuing private alternatives.
Final Private Credit Considerations
Incorporating private credit requires careful consideration of your overall asset allocation and risk tolerance.
Asset Allocation Considerations
When adding private credit to your portfolio, start with a small allocation—typically 5-10% of your total investments. This modest position respects the Boglehead principle of prioritizing low-cost index funds while exploring diversification benefits.
Your age and investment timeline matter significantly. Younger investors might allocate slightly more to private credit due to longer recovery horizons, while those near retirement should approach more cautiously.
Evaluate whether private credit fits within your fixed income allocation or alternative investment bucket. Many Bogleheads consider it part of their higher-risk fixed income exposure.
Diversifying with Private Credit
Private credit can enhance diversification through its lower correlation with public markets. During market stress, this asset class may provide stabilizing returns when traditional bonds and equities struggle simultaneously (ie: 2022).
Private credit can be a useful portfolio tool but isn’t necessary for most investors. If you choose to add it to your portfolio, publicly traded BDCs offer greater liquidity than direct private credit investments.
Maintaining your core three-fund portfolio may be harder as the expense ratios are typically higher with private credit because your portfolio’s expense ratio will be higher with more exposure to higher costing investments. Private credit should complement—not replace—these core holdings, try building a 4-fund portfolio to potentially enhances your overall risk-adjusted total return.
Monitor how this allocation performs quarterly, but resist frequent adjustments based on short-term results, this will ensure you can stay the course to keep building wealth over the long-term.
Practical Steps for Individual Investors
Now that you have decided to add the asset class to your portfolio, you need to figure how do you want to have exposure to the asset class. The key lies in maintaining core Boglehead principles while getting exposure to the emerging asset class. Below are some ways to get exposure to the asset class by either investing in the equity of the lender (BDCs) or the debt of the debtor.
Yes, Public Private Credit
We mentioned PRIV earlier, it is the first ETF of its kind to have private credit assets. PRIV is relatively expensive compared to VTC, Vanguard’s corporate bond ETF, where PRIV has a 0.70% expense ratio and VTC has a 0.03% expense ratio. The advantage with PRIV is that the price of the private credit assets does not fluctuate with changing yields, however the rest of the public credit assets in PRIV do. By adding PRIV, you are getting exposure by owning the debt of private companies. As PRIV is so new, it has no track record and trades below its initial offering price, it is too early to judge this option outside of its expense ratio.
Business Development Companies (BDCs)
Buying shares in BDCs offers investors accessible exposure to private credit, by owning equity in the lender of private credit deals. BDCs lend directly to small and mid-sized private businesses, often at higher interest rates, generating attractive yields for shareholders. One of the main advantages of investing in BDCs is the potential for steady income, as they are required to distribute at least 90% of their taxable income as dividends. Additionally, BDCs offer a liquid way to participate in private credit markets through publicly traded shares.
The downside of owning BDCs can be that they are sensitive to overall market risk and credit risks, which may impact their price daily, their loan performance, and dividend stability. They may also carry higher fees (anywhere from 0.70% to +2.00%) and trade at premiums or discounts to their net asset value (NAV), affecting returns. Despite these risks, BDCs can be a valuable tool for diversifying income-focused portfolios with exposure to private credit.
Fundrise
Fundrise is an investment platform that allows investors to get exposure to private credit and real estate. They offer access to private credit investments such as debt financing for residential and commercial real estate developments. It was the first platform I came across that was accessible to non-accredited investors, and I have personally invested with them as I wanted exposure to private credit and real estate for my portfolio.
While this was one of the first opportunities that opened the door to private credit for non-accredited investors, it comes with risks like illiquidity (liquidating your investment is not quick and only allowed within certain time frames) and a 1.00% expense ratio (0.15% advisory fee + 0.85% management fee). Fundrise offers a venture capital investment option, however it does come with a 2.00% expense ratio (0.15% advisory fee + 1.85% management fee).
Fundrise is a conservative investment choice I made at the start of 2025 that I have had no complaints about. As of April 23rd, 2025 my Fundrise account has a YTD return of 0.60%, which has been better than my public equity portfolio. I personally only have a small amount of my portfolio with Fundrise to try it out and see if I want to invest more later. If you want to invest with Fundrise, use this link for $50 bonus for new Fundrise investors
Disclaimer:
This page contains mentions of publicly traded securities. This is not a recommendation to buy, sell, or trade said securities or their derivatives. Consult a financial advisor for your specific situation. Please visit my personal portfolio to see my financial positions for clarity of my biases or inclinations. This page contains links to other sites that compensate me for referrals