High net-worth investors (HNWI) are actively maximizing diversification in their portfolios beyond traditional stocks and bonds. Alternative investments are a significant area of focus. This includes inquiries about private equity, venture capital, private credit, real estate, hedge funds, commodities, and tangible assets like art and collectibles. Investors are concerned with the risks and rewards of these investments and their liquidity.
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Adding alternative investments to a portfolio can help with today’s market volatility and necessitates a strategic approach to portfolio diversification. Alternatives, a varied category of assets beyond traditional equities and bonds, can significantly enhance portfolio resilience and growth.
Alternatives often display a low correlation with traditional assets like stocks and bonds. As a result, their price movements are not closely linked to these markets. When traditional assets encounter declines, alternatives may retain their value or even appreciate, reducing overall portfolio volatility.
Private equity, a specific alternative, offers higher risk-adjusted returns compared to public equity, especially in volatile markets. Since most holdings in a private equity fund are of private companies (or those on the verge of becoming private), the returns of these funds are distinct from the overall stock market’s performance. Ironically, when the stock market experiences a significant decline, it becomes advantageous for most private equity funds, as they can acquire companies at lower prices to turn them around.
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Maximizing Diversification With Risk-Adjusted Returns And Long-Term Value Creation While Using Alternative Investments
Alternatives often involve investments in illiquid assets with extended investment horizons, allowing managers to unlock potential value and generate substantial returns over time.
Real estate, especially commercial real estate, acts as an inflation hedge. Rental income and property values typically rise alongside inflation, safeguarding against diminished purchasing power.
Commodities, such as gold and oil (which also has income tax benefits), are generally viewed as inflation hedges. Their prices usually increase during inflationary periods, preserving investment value.
Some alternative assets, like infrastructure, gain from inflation. As prices rise, the value of infrastructure projects, such as toll roads and utilities, increases, potentially fostering growth.
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Maximizing Diversification Using Alternative Investments And Income
Private credit offers a steady income stream through non-publicly traded debt securities investments. These investments present higher yields than traditional bonds, making them an appealing option for income-focused portfolios.
Real estate investments, including rental properties, (DSTs) with cash if a 1031 exchange is impractical, or real estate investment trusts (REITs), can produce regular income through rental payments. This can serve as a valuable source of passive income for individuals seeking a stable and predictable return. And since these investments typically have a lock up period and are not public, there is little (if any) stock market exposure or stock market risk.
Dividend-paying alternatives, such as certain infrastructure projects, can provide consistent income through dividends. These dividends can yield a regular income stream and potentially grow over time.
Strategies For Allocating To Alternative Investments That Maximize Returns
Investors considering allocating some capital to alternatives need to follow some common sense guidelines.
Risk Tolerance
Investors need to evaluate risk tolerance before allocating to alternatives, selecting investments that match their individual comfort levels. This ensures the chosen alternatives align with their investment objectives and risk profiles.
Investment Horizon
The time frame for an investment is vital when considering alternatives. Some alternatives, such as private equity and real estate development deals, have a longer investment horizon and may be less suitable for short-term investors.
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Financial Objectives
Alternatives can be customized to meet specific goals, whether it’s generating income, preserving wealth, or pursuing growth.
Alternative investments provide a compelling opportunity to maximize diversification in portfolios, enhance resilience, and potentially yield higher returns. By thoughtfully selecting and managing these investments, advisors can help clients navigate market volatility and achieve their long-term financial goals, including maximizing income using alternative investments.
Securities are offered through Arkadios Capital. Member FINRA/SIPC. Advisory services are offered through Creative Capital Wealth Management Group. Creative Capital Wealth Management Group and Arkadios are not affiliated through any ownership. This material was created for educational and informational purposes only and is not intended as tax, legal or investment advice.