6 Reasons Every Strong Portfolio Needs Alternative Investments
Alternatives include investments in assets such as art, coins, real estate, commodities, or even wine. Many people are selling their wallets short, however, by leaving these crucial assets out of their portfolios. Here are 6 reasons your portfolio needs alternatives in order to be successful.
1. Alternatives provide diversification to protect your portfolio
Diversification is key in a balanced portfolio. We’ve all heard the phrase ‘don’t put all your eggs in one basket’ and this is exactly what we’re referring to. When someone goes all-in on the stock market, that person is putting all of their investment dollars at risk in the event of a down market. If that same person, however, made sure that 30% of their portfolio was not in the stock market, but in an alternative such as gold, then that 30% of their portfolio would remain safe while the other 70% sees the effects of a down market. Diversification is how investors can ensure their dollars are spread over different investments, in case one goes sour.
2. Alternatives react differently to news than the stock market does
One of the most notable advantages of alternatives is the protection they provide against the stock market’s volatility. In today’s landscape of frequent volatility and recession talk, alternatives continue to be a sought after choice. Alternative assets typically perform with a low correlation to stocks and bonds. This means if your stocks are down, your alternatives are likely to remain steady. The two are not correlated, which means investors can have a fallback in the event of their other investments not performing.
3. Alternatives can outperform the stock market
At the end of the day, everyone would like to see higher returns in their portfolio. However, with higher returns, can come higher risk. Alts can be very lucrative and offer returns significantly higher than stocks or bonds. Hedge funds aim for about 25-30%, while real estate investment trusts (REITs) have shown average 20-year returns of 11.8%–both significantly outperforming the S&P 500 Index’s 20-year average returns of 8.6%.
4. Alternatives use time to your advantage
Some investors scoff at the idea of owning an investment that ties up their money for a set period of time. Such investors point to lock-up agreements in alternative investments – private equity, venture capital, and real estate – as being reason enough to avoid them entirely. Investors with this mindset may very well be making a significant financial planning mistake. Let alone missing out on potentially lucrative investment opportunities. The illiquidity aspect of alternative investments is actually what allows them to fare so well. By adding long-term illiquid alternative investments to your portfolio, you are giving your money more time to grow and compound, and you’re also saving yourself from prematurely tapping into funds that have not yet reached full potential. In real estate, for example, properties need time to appreciate in order for investors to achieve desirable returns. Properties don’t typically go up in value overnight, but they historically increase in value year-over-year.
5. Hard assets can protect against inflation
Investing in hard assets such as gold, property, or oil provides a hedge against inflation. These investments provide protection against the decreased purchasing power of the dollar. When prices go up (inflation), these assets are expected to keep their value or even increase their value, therefore protecting your money.
6. More choices for investors
We live in a world of choices, and alternatives give you just that. People enjoy the idea of investing in something other than the cookie-cutter stock and bond market. There is also the allure of investing in an industry that you are interested in, such as coins, wine, real estate, farmland, or cars. No more playing by old-school rules or being limited to few options–with alternatives, you are choosing exactly what you are investing in.
At DiversyFund, we bring investors the unique opportunity to add commercial real estate to their portfolios. We do this through our Growth REIT fund. With one investment, you are diversified across a dynamic portfolio of properties. For all the benefits alternative REIT investments have to offer, click below.
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