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Advanced Investing

How to Take a Good Portfolio and Make it Great

It is common knowledge that one’s diversification strategy is essential in order to manage risk while still yielding a high return on investment. Therefore, if you have too many, or too much allocated to a certain asset class within your portfolio, you’ve most likely already heard or considered that it may be time to expand your investment scope.

So, how do you take a good portfolio and make it a great portfolio?

Diversification. Let’s assume you are a sophisticated investor, and trading stocks, bonds, and commodities are your niche. Depending on the size of your current portfolio, adding a relative amount of illiquid investments can spread risk and leverage your portfolio. Diversifying your portfolio by adding illiquid assets provide multiple proven benefits to keep hungry investors coming back.

Strategically allocating through liquidity

Those who seek long-term investment goals, through the use of illiquid assets, will not be subject to potential short-term market volatility. Part of the reason is restriction.  By investing in an asset that restricts trading, an investor gives up the option to trade an asset. On the other hand, they gain the opportunity to take part in liquidity premium. In that respect, risk-adjusted alternative investments enhance portfolios. Partly due to lower liquidity investments are (historically) shown to translate into higher returns.

Preserving capital is a virtue

Patience is a virtue as it can be vital to an investor. This is especially relevant to those who have long-term investment goals. This is where the lock-up period adds value. No matter the investment, emotion will always play a part in the investment decisions you make. Therefore, if you seek long-term cash flows that give you a substantial cushion during retirement, lock-up periods can help you avoid the possibility of selling what you can, rather than what you should.

By allocating part of your portfolio to towards alternative investments, this will help hedge against market volatility. Yet, you’ll still be earning fairly high risk-adjusted returns. In short, a healthy portfolio captures diversification. This is true in both public markets and alternative investment vehicles. Of course, being mindful of short and long term investment goals.

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