Although stock market indexes (^DJI, ^IXIC, ^GSPC) pushed to consecutive record highs this past month, investors are seeking to diversify their portfolios even further through alternative investments, into categories like real estate, natural resources and commodities, and hedge funds.
Prosperity President Michele Martin joins Yahoo Finance in-studio to discuss the benefits of alternative investing strategies and asset classes.
“Essentially what they can do, if you’re looking to de-risk your stock portfolio, it can buffer on the downside,” Martin explains. “So it’s a strategy that’s covered with puts and calls, and so typically there’s a buffer. It can be 5%, 10%, even up to 25%. So if the market’s volatile and it goes down, you’re protected at that loss buffer. And the thing that’s really interesting about it is you can participate still in market returns.”
For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.
Editor’s note: This article was written by Luke Carberry Mogan.
Video Transcript
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BRAD SMITH: Stock market volatility may be at a multi-year low, but that means being on high alert isn’t a bad thing. As investors brace for a potential market swings ahead, there may be a space worth looking at. Alternative investments such as real estate, hedge funds, or private capital that could be a good place to put some money.
For more on this, I’m joined by Michelle Martin, who is the prosperity president here. Great to have you here with us in studio. First and foremost, we think about different assets to put cash into, but cash is already the most liquid asset that you can have. So, where else is there liquidity in some of the asset classes out there?
MICHELE MARTIN: Yeah, so Brad, as we think about alternative investments, that used to be reserved for just the wealthy. And now there’s liquid alternatives out there. You can actually invest in an ETF that has downside protection, as well as mutual funds that have downside protection. The beauty of that is they are liquid. They have next-day liquidity, which is very different from a traditional alternative investment like real estate, or a hedge fund or maybe even private equity.
BRAD SMITH: How does alternative investments– how do they de-risk a portfolio, perhaps?
MICHELE MARTIN: Essentially, what they can do if you’re looking to de-risk your stock portfolio it can buffer on the downside. So, it’s a strategy that’s covered with puts and calls. And so, typically, there’s a buffer. It can be 5%, 10%, even up to 25%. So if the market’s volatile and it goes down, you’re protected at that loss buffer.
And the thing that’s really interesting about it is you can participate still in market returns. There’s some caps there. You may not– won’t be participating in the full upside, but if risk on the downside is important, and for most people it is, it can improve returns over time.
BRAD SMITH: And so alternative investments can be anything from investing in art to buying out a piece of a music catalog. I mean, there’s so many things. It’s a wide range. What is the number one thought that someone should immediately have that should come to the top of their mind when they’re even thinking about putting part of their portfolio into an alternative investment as well?
MICHELE MARTIN: Alternative investments, really, as you said, it can be very illiquid. Typically, the more illiquid, the more risk, but the greater potential for return. So it’s like the building blocks of your budget. It’s the building blocks of your portfolio.
Do you have enough liquidity? Do you have the portfolio structured in a way that’s going to meet your needs? If you need to tap into it? And then it’s really about knowing what’s in your portfolio and why you have it. And if you are investing in real estate, that is going to have a five to seven-year life or a piece of art. It’s just understanding how that fits into your overall objectives and what your return expectations are as well.
BRAD SMITH: What is the alternative investment in 2024 that is just ripping to the upside right now where you’re seeing a massive amount potential of inflows into it?
MICHELE MARTIN: Alternative credit is a space that has been really wonderful for our client portfolios, aside from traditional credits or traditional credit. Just typically, we’re in a place right now where interest rates are higher, so investors that can be really good news for our investors. So, a typical return on a core bond portfolio today is around 5%. But in the alternative credit space, we’re seeing returns anywhere, even from 8% to 10% over the last year. And so that’s really been an area that we’ve seen some true outperformance in our portfolios.
BRAD SMITH: Really fascinating tracking that. Thank you so much for joining us here in studio. Michelle Martin, Prosperity President here with us on Yahoo Finance.
