Most people are familiar with stocks and bonds, and many traditional portfolios have a 70:30 or 60:40 split between the two, which has historically worked well. But there may be good reason to revisit your portfolio strategy and potentially include alternative investments in your long-term strategy if your current portfolio consists solely of stocks and bonds.
What are alternative investments?
Alternative investments can be defined as investments in assets other than traditional stocks and bonds. Alternative investments cover a wide range of assets that each have their own unique characteristics and can be a great complement to your existing portfolio of traditional assets. Real estate, renewable energy and infrastructure are just some examples of alternative assets. For more insight into the individual assets, our guide to alternatives is recommended.
Alternative investments differ from other asset classes, for example, by their presence in unlisted or private markets. However, some alternative assets such as commodities can be traded on listed markets. The presence in the unlisted markets allows investors to diversify their portfolio and in some cases reduce risk, as investments can have low correlation to listed markets such as the stock and bond markets.
By including alternative investments, investors can better manage volatility, achieve true diversification, and in this way achieve a higher risk-adjusted return. The overview below shows how alternatives in different portfolios can reduce your risk without reducing returns.
Alternative investments have unique characteristics
Because alternative investments have a low correlation to traditional assets, the overall risk and volatility, the fluctuations seen in stocks and bonds, for example, are significantly lower. The reason for this is how returns are generated. Asset classes such as real estate, renewable energy, and infrastructure are characterized by their ability to generate a continuous operating cash flow that generates returns for investors. Due to these operating cash flows, there is also some form of inflation hedging. This is particularly evident in real estate investments but also applies to some extent to renewable energy.
Adjusting the portfolio strategy
A portfolio strategy should be based on the investor’s individual needs and preferences, current investments, time horizon, risk profile, and tolerance for lower liquidity.
Alternative assets can be divided into three strategies:
Within these three strategies, each alternative asset will have a number of unique characteristics, each contributing differently to these strategies. If an investor is looking to reduce their exposure to listed markets, real estate and infrastructure in particular will be obvious choices to include in the portfolio. Therefore, it is important to understand the individual uniqueness of the different alternative asset classes in relation to the composition of one’s portfolio. The overview below breaks down various assets based on the overall strategy they contribute to.
If you would like to learn more about alternative investments, you can read more here:
You can explore your opportunities for alternative investments through Selected Alternatives here
Receive our Guide to Alternatives and learn about the characteristics of the different alternative asset classes and the benefits and risks associated with them.