Traditional investments like stocks and bonds have long been the cornerstones of investment portfolios. However, in today’s dynamic and uncertain financial landscape, many investors are looking beyond these conventional options and turning to alternative investments.
These assets have gained popularity for their unique benefits, and they may be a valuable addition to a well-balanced portfolio.
Alternative investments, also known as “alt investments,” encompass a diverse range of assets beyond stocks, bonds, and cash equivalents. They can include tangible assets like real estate, precious metals and art, as well as financial assets like hedge funds, private equity, venture capital, and cryptocurrencies. The key characteristic of alternative investments is that they do not fall into the traditional categories of stocks and bonds. What are some of the benefits of alternative investments?
Diversification: One of the most significant advantages of alternative investments is their ability to enhance portfolio diversification. Diversification is the strategy of spreading your investments across various asset classes to reduce risk. By adding alternative investments to your portfolio, you can reduce your exposure to the ups and downs of traditional markets, making your overall investment strategy more robust.
Alternative investments often exhibit low or even negative correlations with traditional asset classes. This means that their value does not necessarily move in tandem with the stock and bond markets. During periods of market volatility, having non-correlated assets may help cushion your portfolio from significant losses.
Access to unique opportunities and higher returns: Alternative investments provide access to unique opportunities that are not readily available in traditional markets. For example, venture capital and private equity investments offer the chance to support innovative startups and gain exposure to potentially groundbreaking technologies and industries.
Investing in a private startup through a venture capital fund can yield substantial returns if the company becomes successful. Similarly, investing in a private real estate fund can provide access to premium properties that may not be available to individual investors.
Hedge against inflation: Alternative investments such as real assets (real estate, farmland, and infrastructure) may act as an effective hedge against inflation. As the prices of goods and services rise over time, the intrinsic value of these assets tends to appreciate, helping your portfolio maintain its purchasing power.
Alternative investments offer a compelling range of benefits, from portfolio diversification and risk management to the potential for high returns. However, it’s important to note that these benefits come with their own set of challenges, including increased complexity, illiquidity, and higher fees. Therefore, it’s crucial to thoroughly research and assess alternative investment opportunities before incorporating them into your portfolio.
Investors should consult with a fiduciary financial professional and consider their risk tolerance and investment goals when adding alternative investments to their portfolios. When used thoughtfully and prudently, alternative investments can play a valuable role in achieving a well-rounded and resilient investment strategy in today’s ever-changing financial landscape.
Aaron Rheaume is a partner and chief investment officer with the Financial Enhancement Group. He can be reached at arheaume@yourlifeafterwork.com or 800-928-4001.
