When it comes to investing, diversification is key. The old adage “don’t put all your eggs in one basket” holds true, and it’s important to spread your investments across a variety of assets. While most investors are familiar with stocks and bonds, alternative investments offer a unique opportunity to further diversify your portfolio.
Alternative investments refer to any investment outside of traditional stocks, bonds, and cash. They include assets such as private equity, real estate, commodities, hedge funds, and more. Here are some reasons why diversifying with alternative investments can be important for your portfolio.
- Reducing risk
One of the main reasons to diversify your portfolio is to reduce risk. Alternative investments often have a low correlation to the stock market, meaning that they can perform well even when the stock market is struggling. For example, during the 2008 financial crisis, many alternative investments such as real estate and commodities held their value or even increased in value, while stocks and bonds plummeted.
By including alternative investments in your portfolio, you can reduce the overall risk of your investments. If one asset class performs poorly, the other asset classes may perform well, balancing out any losses. This can help protect your portfolio from market volatility and downside risk.
- Potentially higher returns
Another reason to consider alternative investments is the potential for higher returns. Alternative investments often offer returns that are not available through traditional investments. For example, private equity and venture capital investments can offer the potential for significant returns, but are not available to most individual investors.
Real estate is another alternative investment that can offer attractive returns. Not only can real estate investments provide rental income, but they also offer the potential for capital appreciation as the value of the property increases over time.
By including alternative investments in your portfolio, you may be able to achieve higher returns than you would with a traditional portfolio of stocks and bonds.
- Access to unique opportunities
Alternative investments offer access to unique investment opportunities that may not be available through traditional investments. For example, investing in a startup through a venture capital fund can offer the opportunity to invest in the next big thing before it becomes widely available to the public.
Similarly, investing in real estate through a private equity fund can provide access to properties and deals that may not be available to individual investors. By diversifying with alternative investments, you can access a wider range of investment opportunities that may not be available through traditional investments.
- Hedge against inflation
Alternative investments can also provide a hedge against inflation. Traditional investments such as stocks and bonds may not perform as well during periods of high inflation, as the value of the returns may be eroded by inflation.
Alternative investments such as commodities, real estate, and infrastructure can provide a hedge against inflation, as they often have a direct relationship to inflation. For example, the value of real estate often increases during periods of high inflation, as the cost of construction and materials increases.
By including alternative investments in your portfolio, you can help protect against the negative effects of inflation on your portfolio.
- Diversification within alternative investments
Finally, it’s important to note that alternative investments themselves can offer diversification within the asset class. For example, within real estate, there are different types of investments such as commercial, residential, and industrial properties. Within commodities, there are different types such as precious metals, agricultural products, and energy.
By diversifying within alternative investments, you can further reduce risk and increase potential returns. However, it’s important to do your research and understand the risks associated with each type of investment.
In conclusion, diversification is key when it comes to investing, and alternative investments can offer a unique opportunity to further diversify your portfolio. By including alternative investments, you can reduce risk, potentially achieve higher returns, access unique opportunities, hedge against inflation