How to Diversify Your Portfolio with Alternative Investments
Diversification is one of the hallmark strategies for building a healthy financial portfolio. By investing in different asset classes, you avoid putting all those proverbial eggs in one basket and lower the risk of being affected by unexpected adverse market fluctuations.
Are you interested in alternative investments? We'll guide you in elevating your investment strategies by providing insights on incorporating alternative assets for a more resilient and balanced financial portfolio.
What Are Alternative Investments?
Alternative investments are those financial assets that don't fall into the conventional categories of stocks, bonds, and cash. As a general rule, most alternative investments can be classed as either public or private.
Public alternative investments report their holdings publicly. A hedge fund, for example, is among the public alternative investment solutions. A professional manager pools money from investors and invests that money in often complex and higher-risk ways to see higher-than-average returns. Hedge funds are required to file quarterly reports, and most send out information to their investors more regularly.
Private alternative investments include private equity encompassing venture capital, private credit, and infrastructure. Private equity and venture capital buy shares of private businesses, whereas hedge funds invest in publicly traded ones.
There are, of course, some alternative investments that don't fit a public or private designation, and these include commodities like gold, silver, grains, or oil, along with real estate and cryptocurrencies. The alternative investment market also includes art, collectibles, wine, peer-to-peer lending, and farmland.
Reflecting on Your Portfolio
It's a brand new year and the perfect time to pause and reflect on your portfolio. Have your financial goals changed? Are your investment strategies responding to those changes so that you see the best returns? If they aren't, what adjustments can you make?
Alternative investments aid in diversifying a financial portfolio and adding a resiliency that helps to protect it. A wise investor isn't so much concerned about choosing the right stock or investment as they are about achieving a balance of assets. Risk and reward need to be carefully evaluated, with the goal being that no single investment dramatically influences the portfolio's overall performance. A balanced portfolio will weather market fluctuations. Remember, building wealth is a marathon, not a sprint.
Risk and Reward
As an investor, you can optimize your portfolio's behavior by reducing risk or increasing reward. Investors have to take more risks to see higher rewards during times of low rates. This results in an investment environment of maximizing reward.
With the changed times and higher rates, investors should focus on alternative investment platforms that reduce their risk. Limit strategies such as personal loans, credit, and high-yield investments that are tied directly to rates. When inflation is high, certain fixed-yield investments may quickly underperform.
Look for equity-style alternative investment solutions where the asset is more like a stock or bond. These types of investments have demonstrated better resilience in a high-inflation economy.
Build Exposure to Alternatives
With your goals and timeline in mind, explore the different offerings and examine how they best fit your financial goals. An investor a decade away from retirement will want to invest differently than one in their 20s and just starting. Still, both should be adding alternative investments to their portfolios.
Alternative investment solutions as a strategy for building wealth are more effective and undoubtedly less stressful than trying to time the market or pick individual stocks.
Popular Alternative Investments in 2024
A time of high inflation can present some challenges for investors because while the investment may be growing, the flipside is that the value is reducing. It's essential to seek out investments that will benefit from inflation and pass on those that tend to be particularly struck by economic downturns.
Let's consider a few alternative investment solutions that wise investors should look at in 2024.
Investing in real estate doesn't mean you must become a landlord and directly own a property or building. There are indirect opportunities for real estate investing, including crowdfunding and REITs (real estate investment trusts). Real estate offers that hedge against inflation and generates income through rent, appreciation, and interest payments.
U.S. savings bonds earn interest based on a fixed rate and the inflation rate. They are backed by the U.S. government, making them virtually risk-free, and they help protect wealth from inflation.
This involves investing in private companies that aren't listed on the stock exchange. Private equity investments are generally long-term and carry higher risk, but on the other hand, they tend to offer higher returns. Invest only what you can afford to lose.
These are pools of investor monies that skilled professionals, experienced in complex trading activities, manage. Because of the risk, hedge funds are typically only available to accredited investors and charge higher fees than mutual funds.
Commodities trading involves raw materials and resources like gold, energy (oil), and agricultural products. Futures contracts and exchange-traded funds (ETFs) are two means of commodities trading. Volatility tends to be a trademark of commodities, but its strength is that it offers diversification.
Art, vehicles, antiques, and wine are all examples of collectibles that can appreciate over time. Some investors also like collectibles for their aesthetics and the emotional satisfaction they provide. The tricky thing about collectibles is their illiquidity, and they aren't highly regulated, which can catch an inexperienced investor unaware.
Bitcoin, Ethereum, and Dogecoin are examples of digital or virtual cryptocurrencies. They use the blockchain, a decentralized ledger, for transactions and security. Be quite cautious. Cryptocurrency is a highly volatile and less regulated alternative investment.
Peer-to-peer online lending platforms can connect investors to individuals or small businesses. Peer-to-peer comes with risks, but it can also offer investors higher yields than traditional opportunities such as bonds or certificates of deposits.
Alternative Investments Growing in Popularity Among Experienced Investors
For many years, the 60/40 split (60% equities, 40% bonds) was the standard for the balanced portfolio. But times have changed, and investors and managers alike are voicing their support for portfolios that include a variety of asset classes and not just stocks and bonds.
Wealthy investors are creating the new benchmark of 40-30-30 (40% stocks, 30% bonds, 30% alternative investments). They also have an increasing interest in evergreen or perpetual funding, where they can gradually infuse capital into a new or recapitalized company. Unlike traditional private funds, Evergreen investments don't have fixed end dates.
Millennials are creating their own investing trends, too. The Silicon Valley Bank crash in March 2023 was the third biggest bank failure in U.S. history. According to a survey by Retirement Living, a retirement resource company, 43% of millennials made alternative investments in the six months leading up to the SVB collapse. After the failure, 1 in 4 of the survey's respondents reported increased interest in these investments.
Seventy-eight percent of the respondents noted that they had made investments in the six months before the bank failure, but only about one-third were alternative investments.
Investors are becoming much more willing to be adaptable and innovative. An iCapital survey of 400 U.S. registered advisors revealed changing attitudes. Ninety-five percent indicated they would allocate the same or more funds to alternative investments in the coming year. And half of the advisors stated that client interest in alternative investment solutions has increased in the past two years.
In the iCapital survey, 78% of the advisors indicated that they invested in real estate as an alternative investment. Historically, real estate has been a low-risk investment that acts as a hedge against inflation, appreciates over time, builds equity and wealth, and provides cash flow.
Connect Invest specializes in real estate investing and offers this alternative investing opportunity for beginners and experienced investors alike. Short notes fund a diversified portfolio of residential and commercial real estate projects. Investors earn high-yield, fixed-rate, passive income, and commitments are as short as six months. There is zero overhead, good liquidity, and no fees.
It costs as little as $500 to begin investing, and setting up an account with your easy-to-use digital wallet takes just a few minutes. If you're ready to invest, start here - there is no time like the present to begin investing and growing your wealth!