Investors looking to diversify their portfolios from traditional investments are often curious about alternative investments, but in order to decide whether or not adding alternative investments to your own financial strategy makes sense, you must first understand what they are, how they work, and the potential risks and benefits they retain.
Generally speaking, alternative investments behave differently and come with significantly different risks than stocks, bonds, and other traditional assets. As such, they generally fall into one of two broad categories: alternative strategies such as hedge funds and managed futures strategies, and alternative assets, such as commodities and private real estate. Depending on how they are used, adding alternative investments to a portfolio may provide broader diversification, reduce risk, enhance returns, and result in a smoother performance ride.
Hedge funds, for example, carry a range of trading strategies that differentiate them from traditional stock and bond portfolios, and therefore have the ability to diversify a traditional portfolio. Private equity investments, meanwhile, have different risks than publicly traded companies, so clients investing there may also see enhanced diversification and returns.
The value of commodity funds rises and falls based on demand, protecting against inflation risk. And finally, private real estate investing can provide a good source of diversification thanks to its lower correlation with stock, bond, and cash returns, as well as its reputation as a strong generator of cash flow.
Alternative investments are often perceived as being more risky than stocks and bonds. However, because of their different risks, traditional investment portfolios can experience less volatility by adding alternative investments.
Your Bartlett advisor can help you navigate the many perspectives and opinions around alternative investments. Our process for selecting alternative investments to consider consists of two fairly simple questions:
- Does the investment carry significantly different risks than stocks and bonds?
- Do we expect to be compensated fairly for the investment?
If the answer to both questions is yes, the internal Bartlett investment team will consider the option in full review. If you’re an investor looking to diversify your portfolio, contact your Bartlett wealth advisor today to learn everything you need to decide whether or not alternative investments are right for you.