Alternative investments offer an exciting new way to diversify portfolios. When used properly, strategies like hedge funds, private equity and real estate investments can add tremendous value by diversifying risk while potentially speeding up returns.
Strategies in this category typically feature low correlations with equity markets and may combine traditional market risk factors with nontraditional betas such as options trading or relative value arbitrage. Furthermore, they typically boast longer time horizons and reduced liquidity requirements compared to public markets.
Diversification
Substantial alternative assets into your financial portfolio is key to reaching long-term wealth goals, helping avoid all your eggs being placed into one basket and giving your investments resilience against unexpected adverse market fluctuations.
Diversification is an investment principle with simple logic: by spreading your investments across various asset classes, it reduces the chance that one class alone will erode your total returns significantly. Diversification should include traditional stocks and bonds plus cash investments along with non-traditional ones like real estate and hedge funds.
Non-traditional assets often don’t correlate, and can offer unique returns that will augment your overall investment returns. For instance, investing in railroad and airline stocks may help offset adverse effects on transportation industries while diversified bond strategies can offset market losses.
Volatility Management
Volatile markets can present investors with a daunting challenge. But strategies focused on diversification, dollar cost averaging and defensive assets can help navigate short-term turbulence as they work towards reaching their financial goals.
An investment policy statement can also help keep you on course during uncertain times, serving as a reminder of your objectives, constraints, and risk tolerance – helping ensure you don’t make emotional decisions that result in selling too soon or making untimely financial transactions.
Professional assistance can assist in the analysis and asset allocation for your portfolio, keeping in mind your time horizon and risk tolerance. In times of troubled waters they provide guidance and assistance.
Research-driven investments are crucial when considering volatile investments. Carefully examine all fundamentals, such as strong management teams, clear paths to profitability and competitive advantages–in order to avoid “FOMO”, or panic selling that often occurs in volatile market environments.
Inflation Protection
Inflation can quickly devastate a portfolio containing stocks and bonds. Inflation protection strategies seek to mitigate this risk by investing in assets with potential upside potential over the longer term, and protecting existing bonds from inflation’s negative effect.
Alternative investments may not be suitable for every investor; they tend to be more complex, less liquid, and sometimes illiquid in nature; but for the right investor(s), alternative investments can add an additional layer of diversification and help achieve financial goals more quickly.
Advisors need to assess a number of factors when selecting an alternative investment strategy for their client portfolios, including types and levels of risk already present, desired outcomes and required levels of volatility. Therefore, taking an integrated approach towards alternative implementation is vital.
Return Enhancement
Alternative investments can bring greater returns without increasing volatility, such as equity market-neutral, event-driven trading options trading relative value arbitrage or multistrategy strategies that utilize traditional and nontraditional risk factors to provide more diversified long-term return potential with less market crashes sensitivity.
Many may believe they need a finance degree and office on Wall Street to invest in alternatives, but many average investors can easily take advantage of self-directed IRAs for investment into commodities, private equity funds, real estate assets or hedge funds to diversify their portfolio and add resilience.
By using both traditional and alternative investment strategies, we can tailor a financial plan that addresses your unique goals and timeline. Reach out to us to discover how you can expand beyond stocks and bonds when it comes to building your portfolio.
