Asset allocation is the act of deciding which types of investments to put into a portfolio, when to put them in, and in what proportion. While traditional investment assets, such as equities, fixed income and cash equivalents, are important elements of a portfolio, today’s investors often need more. For many investors, alternative investments can be an important way to expand a portfolio’s asset allocation opportunities—providing diversification benefits and return potential to a well-constructed portfolio.
Key benefits of alternative investments
As part of a well-constructed portfolio, alternatives can help you:
- potentially enhance risk-adjusted returns
- decrease portfolio volatility over time
- improve portfolio efficiency
- increase diversification
Alternatives can enhance risk-adjusted returns
Alternative investments represent an extensive set of diverse strategies and assets with different risk-and-return characteristics than conventional asset classes like stocks and bonds. When alternative investments are used in combination with traditional investments, you can enhance returns over the long term without taking on significantly more portfolio risk. Learn more about how different alternative investments can help enhance risk-adjusted returns.
Alternatives can play a role in a well-diversified portfolio
A well-diversified portfolio has a greater variety of assets. If all your assets moved higher or lower at the same time, reacting the same way to certain market conditions or economic events, your portfolio would be vulnerable to wide swings in performance. When you hold different asset classes in your portfolio—including alternative investments—you can improve its diversification, which in turn can help you manage volatility over time. Read more about how alternative investments can help diversify your portfolio.
Today, more investors can benefit from alternatives
Traditionally, alternative strategies have been the territory of institutional and accredited investors. As such, they’ve typically had higher investment minimums and required a greater level of investment knowledge to evaluate potential opportunities and risks. Fortunately, you don’t have to make your own direct investments in alternatives. Today, there are other ways to gain exposure to the diversification benefits of alternative investments, including mutual funds and exchange-traded funds, which mitigate some of the embedded risks and potential drawbacks of these types of investments.
Your MD Advisor can help determine if alternative investments are right for you, and help you discover the different ways you can access alternative investments for your total wealth plan.