When you think of constructing your portfolio, what comes to mind? Historically, for many investors, this meant a combination of stocks and bonds. For years, retail investors and financial advisers have recommended a blend of stocks and bonds to create portfolios based on your appetite for risk. In theory, as stocks experience volatility, bonds can add stability to your portfolio. But what happens when both stocks AND bonds are volatile? What happens when bonds also go down? And what happens when interest rates remain low? For years, large institutional investors like endowment funds, sovereign wealth funds, pension funds, and more have addressed this issue with alternative asset classes.
What exactly is an alternative asset?
Our Definition: An alternative asset is one that is not a traditional stock or bond. These assets can include, but are not limited to:
- Private Equity
- Real Estate
- Private Credit
- Derivatives
- Market Neutral Funds
- Digital Assets
Why should we incorporate alternative assets in our portfolio? Utilizing alternative assets within a portfolio provides true diversification in a world where public stock and bond markets are becoming more volatile. The classic 60/40 balanced portfolio which is 60% stock and 40% bonds has been the foundation upon which many financial advisers and fund managers create a moderate risk profile with an intermediate time horizon. But, many argue that as alternative strategies have become more accessible to everyday investors, not just the ultra-wealthy, the classic 60/40 model is “dead”. The strategies that the ultra-wealthy, the world’s largest endowment funds, sovereign wealth funds, and pension funds have utilized for decades are becoming more accessible. So, how can you incorporate alternatives into your portfolio? Here are some measures you can take to ensure you too can have an institutional-like portfolio that aligns with your financial objectives:
Start with a Financial Plan
Like with any investment strategy that you decide to implement within your portfolio, it should all be based on your financial plan. Your financial plan will dictate how much liquidity is needed in your portfolio, what parts of the portfolio you can choose to be more aggressive in, and what type of assets to use.
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Work with a Financial Professional
Because of the complex nature of alternative assets, some assets can only be accessed with the help of a licensed financial professional. Keep in mind that complexity does not necessarily mean risky. Alternative assets can certainly be risky and volatile, however many are not and can reduce the volatility in your portfolio and can help produce good risk-adjusted returns. Alternatives do not mean “riskier” they simply mean a trade-off in liquidity for a differentiated return.
Remain Disciplined
Once investors have experience in the alternative asset space, there can be a temptation to overweight this portion of the portfolio. Just like with any other asset class, whether it is an alternative asset class, stocks, or even bonds; rebalancing and remaining a disciplined investor are still the keys to long-term success
The universe of alternative assets may seem endless, but the good news is that these assets and strategies have become more accessible to the everyday investor. What was once an asset class exclusively reserved for the ultra-wealthy or large institutions can now be used by many.
If you are looking for a way to create an alternative portfolio allocation that aligns with your financial plan, MDRN can help you reach your goals.
