The importance of a balanced, diversified investment portfolio should never be underestimated. But now more than ever, the addition of alternative investments to an experienced investor’s portfolio to aid in targeting inflation-beating potential returns and managing volatility is a crucial consideration.
At present, interest rates are at an all-time low, with the best instant-access savings account offering just 0.65%. Meanwhile, investors with exposure to the equities market are still witnessing severe fluctuations 18 months after the initial Coronavirus-induced crash, as the FTSE 100 saw £50 billion wiped off share values on 19th August amidst worries over Covid-19 variants.
And whilst alternative investments saw increasing levels of popularity even before the effects of Covid-19 took hold, the unappealing performance of some mainstream assets of late has bolstered them further.
NextGen Cloud found that 43% of investors surveyed — all with a portfolio value in excess of £10,000 — were now more inclined to consider alternative investments in the wake of the economic impacts of Coronavirus.
Unconnected to the fluctuations of the stock market and the Bank of England base rate – which will remain at a rock-bottom 0.1% for the foreseeable future – and offering a range of assets from collectables and cryptocurrencies, to property bonds and venture capital, alternative investments have the potential to be particularly beneficial for diversification.
Using alternative investments to balance volatility and target inflation-beating potential returns
One of the most common assets in an investor’s portfolio is equities, and their potential for significant long-term capital growth makes their fluctuations manageable for many experienced investors.
Whilst said fluctuations are to be expected to some degree, when looking at a diversified portfolio, the inclusion of assets – such as alternative investments – that are mostly unaffected by the factors affecting the stock market can be beneficial in mitigating risk and maximising returns.
Different assets will often react differently to certain events — as has been evident over the past 18 months, when some sectors faltered in response to the Coronavirus pandemic, whilst others proved resilient. Therefore a portfolio consisting of a varied selection of both mainstream and alternative investments is crucial, helping to provide much-needed balance.
Clearly the alternative asset suitable for an experienced investor’s portfolio will be dependent on personal circumstances, risk tolerance and investment goals, but it would be somewhat surprising if even the most niche-focused of investors couldn’t find an alternative investment option to suit their portfolio.
For example, cryptocurrencies have rocketed in popularity over the last five years in particular and many investors have generated very notable returns. But they are one of the most volatile investments currently available and may not be the most appropriate option for investors intending to balance out the volatile nature of equities.
This was evidenced in May 2021 when one Tweet from Tesla CEO Elon Musk — which stated Tesla would no longer accept Bitcoin, the cryptocurrency market leader, as payment for their cars — caused the whole market to crash.
Instead, experienced investors could consider property bonds. Though there is still no guarantee of returns, property bonds are uncorrelated with the fluctuations of the stock market, and most often come with a fixed-term and set target rate.
These can add structure to a portfolio – often boasting opportunities to have returns realised quarterly as well as upon maturity – and be particularly useful for experienced investors looking to rethink their traditional 60:40 stocks to bonds portfolio.
In a 60:40 portfolio, lower-risk bonds (40%) act as somewhat of a protective blanket against the fluctuations of higher-risk stocks (60%). But interest rates are at an all-time low, and whilst property bonds are higher-risk than the likes of Government bonds, their potential returns of between 4% and 8% can make them a key consideration as a supplement.
What’s more, in comparison to the performance of other methods of investment into the residential property sector, these set, inflation-beating target returns – at a time when the Consumer Price Index places inflation at 3.2% for the 12 months up to August, with cash unable to keep pace – could be particularly attractive to experienced investors looking for capital growth.
Adding alternative investments for a diversified portfolio
With a wealth of assets to choose from, allowing access to a variety of sectors, and often inflation-beating potential returns, the popularity of alternative investments among experienced investors is undoubtedly growing.
With it highly likely that there is a suitable option for most of said investor’s portfolios, and due to their lack of connection to most mainstream assets, they can be vital for adding an all-important element of diversification.