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How to Leverage on Alternative Investments to Diversify Your Portfolio?

Alternative investments are called “alternative” because they are not mainstream in the past

alternative investments are turning Mainstream

In the past, they are harder to access for most investors as they require a large minimum investment and longer lock-up period. They were not so liquid. They were available only to high net-worth individuals and institutions.

It has became more mainstream in recent years and these barriers to entry are being removed. They are now more widely available, more popular, more liquid and more transparent.

It is prudent for investors to allocate a portion of alternative investments in their portfolio to improve their risk-return.

What are alternative investments?

Types of Alternative Investments

They are asset classes outside the traditional classes of cash, bonds and and stocks. Alternative investments include private equity, hedge funds, managed futures, and alternative mutual funds. They include tangible assets such as real estates, precious metals, currencies, collectibles and commodities. 

Benefits of Alternative Investments

Alternative investments offer some benefits, namely, diversifying your investment portfolio, they are less volatile than equities, and improve the risk profile. They are a hedge against inflation.

With a diversified portfolio, when one type of investment is losing money, another may be gaining. Alternative markets perform well when traditional markets fail.

How do you leverage on alternative investments into your investment portfolio? Here are some consideration.

Look for Alternative Investment with Proven Track Record

Be conservative. The performance is dependent on the manager’s skill.  Go for products with proven track record.

Allocation of Alternative Investments in your Portfolio

Allocate 10-20% of your portfolio to alternative investments – large enough to make an impact or reduce the risk, while not dominating the portfolio. The percentage depends on your risk appetite and objectives.

Work with Experienced Manager

Work with an experienced advisor who is knowledgeable and can help you to select and monitor your alternative investments.

Alternative investment, like any others, have its own risk.  It is important that investors are comfortable with this investment strategy, and to discuss with their financial advisors to determine if it is suitable to  their unique circumstances and objectives.