Potential Benefits of Adding Alternatives to Your Investment Portfolio

In today's ever-changing investment landscape, a traditional "60/40" allocation to equities and bonds may no longer be enough to meet long-term investment goals. Investors are increasingly looking for ways to lower volatility, enhance returns, and broaden diversification of their portfolios. One strategy that has gained popularity is adding alternatives to the investment mix. In this article, we will explore the potential benefits of investing in alternatives and how they can help improve the risk and return profile of your portfolio.

Understanding Alternatives

What are Alternatives?

Alternatives refer to investment options that go beyond traditional equity and bond investments. They encompass a wide range of assets, including real estate, hedge funds, private equity, commodities, and infrastructure. These investments generally have lower correlation with traditional asset classes, meaning their performance is less influenced by broad market trends.

Blending Investment Universe

By including alternatives in your investment portfolio, you are expanding your investment universe. This broader universe provides access to a wider range of investments and strategies that can potentially enhance your returns. Alternatives typically rely less on broad market trends and more on the strength of each specific investment. This can help reduce the overall risk of your portfolio by diversifying across different asset classes and investment strategies.

Competition for Prime Assets

As more investors recognize the benefits of alternatives, the competition for prime assets has increased. Alternative investments often involve unique opportunities that are not readily available in traditional markets. For example, investing in real estate can provide exposure to income-generating properties, while private equity investments can offer access to high-growth companies. However, it's important to note that the increasing demand for alternatives may also lead to higher valuations and potential challenges in finding attractive investment opportunities.

Potential Benefits of Investing in Alternatives

Lower Volatility

One of the key benefits of adding alternatives to your portfolio is the potential to lower volatility. Traditional equity and bond investments are often subject to market fluctuations that can result in significant price swings. Alternatives, on the other hand, tend to behave differently and may not be as influenced by broad market trends. This lower correlation to traditional asset classes can help stabilize the overall performance of your portfolio, reducing the impact of market volatility.

Broader Diversification

Diversification is a fundamental principle of investing. By spreading your investments across different asset classes, you can reduce the risk of your portfolio. Alternatives can play a crucial role in diversification as they have low correlation with traditional asset classes. This means that when traditional investments are underperforming, alternatives may still provide positive returns. By including alternatives in your portfolio, you can achieve a more balanced and diversified investment mix.

Enhanced Returns

In addition to lowering volatility and diversifying your portfolio, alternatives can also enhance your overall returns. The unique characteristics of alternative investments offer the potential for higher risk-adjusted returns. For example, investments in private equity or venture capital can provide access to high-growth companies that may not be available in public markets. Real estate investments can generate income through rental yields and potential capital appreciation. By including alternatives in your portfolio, you can tap into these additional sources of return that may not be available through traditional investments.

How to Incorporate Alternatives in Your Portfolio

Understand Your Risk Profile

Before adding alternatives to your portfolio, it's important to understand your risk profile and investment objectives. Alternatives can have varying levels of risk and return, and it's crucial to align your investment strategy with your risk tolerance. Working with a financial advisor can help you determine the appropriate allocation to alternatives based on your individual circumstances and goals.

Consider Different Asset Classes

When incorporating alternatives into your portfolio, consider diversifying across different asset classes. This can help mitigate risk and enhance returns. Some common alternative asset classes to consider include real estate, private equity, hedge funds, commodities, and infrastructure. Each asset class offers unique characteristics and can provide exposure to different market opportunities.

Evaluate Investment Strategies

Within each asset class, there are various investment strategies to consider. For example, in real estate, you can invest in residential properties, commercial properties, or real estate investment trusts (REITs). In private equity, you can choose between growth-focused or value-focused strategies. It's important to evaluate these strategies and select the ones that align with your investment goals and risk tolerance.

Due Diligence and Research

When investing in alternatives, conducting thorough due diligence and research is crucial. Unlike traditional investments, alternatives often involve less liquid and more complex investments. This makes it important to understand the underlying assets, investment terms, and potential risks associated with each alternative investment. Consider working with a financial advisor or conducting your own research to ensure you have a comprehensive understanding of the investment before committing your capital.

Monitor and Review

Once you have incorporated alternatives into your portfolio, it's essential to regularly monitor and review their performance. Alternatives can have longer investment horizons and may require a different approach to monitoring compared to traditional investments. Stay informed about market trends, evaluate the performance of your investments, and make adjustments to your portfolio as needed. Regular portfolio reviews with a financial advisor can help ensure your investment strategy remains aligned with your goals.

Alternatives Do Have Their Risks:

Alternative Investments can involve substantial risks that may be greater than those associated with traditional investments and are not suitable for all investors. These risks include but are not limited to: limited or no liquidity, tax considerations, incentive fee structures, speculative investment strategies, and different regulatory and reporting requirements. Investors should only invest in alternative investments if they do not require a liquid investment and can bear the risk of substantial losses. There is no assurance that any investment will meet its investment objectives or that substantial losses will be avoided. Investors should carefully review any offering materials or prospectuses prior to investing.

Conclusion

Incorporating alternatives into your investment portfolio can offer numerous benefits, including lower volatility, broader diversification, and enhanced returns. By expanding your investment universe and including assets with low correlation to traditional investments, you can potentially reduce risk and increase the potential for long-term growth. However, it's important to carefully evaluate each alternative investment, consider your risk tolerance, and conduct thorough due diligence before making any investment decisions. Working with a financial advisor can help guide you through the process and ensure your portfolio is well-positioned to meet your long-term investment goals.

For additional information and resources, call to schedule an appointment with one of our financial advisors at Talent Financial Services.

Any opinions are those of the speaker and not necessarily those of Raymond James. This material is being provided for informational purposes only and is not a complete description, nor is it a recommendation. There is no guarantee that these statements, opinions or forecasts provided will prove to be correct. Investing involves risk and you may incur a profit or a loss regardless of strategy selected. No investment strategy can guarantee your objectives will be met. The stock indexes mentioned are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

There is no assurance that any investment will meet its investment objectives or that substantial losses will be avoided. Investors should carefully review any offering materials or prospectuses prior to investing.