Investment managers use a few different tools to balance and optimize your portfolio. This helps protect it against possible losses and also to maximize your gains. One of the most important things to do is include at least a few alternative investments.

Alternative investments are financial assets that you would not find in your usual selection of investment instruments like stocks and bonds. They could include venture capital, hedge funds, managed futures, art and antiques and private equity. Putting at least some of your funds into alternative investments is a wise choice. They provide a great way to diversify your portfolios – and diversification is one of the keys to investing success.

The investment advisors at Momentum Wealth often advise our clients to incorporate alternative investments in order to ensure portfolio diversification. 

What is a Diversified Portfolio?

Diversification is essentially a matter of spreading your capital over several different investments to offset risk and improve gains. You should allocate your capital across a broad array of investments, financial instruments, stocks and industries. The old adage about “putting all your eggs in one basket” really helps to sum up the wisdom behind this technique. Spreading your capital across multiple investments means that you can prevent major losses when certain sectors or markets take a downward turn. 

When exploring different ways to diversify your portfolio, you should definitely consider alternative investments.   

Types of Alternative Investments for Portfolio Diversification

Some of the most common forms of alternative investments are:

  • Private equity: You can invest your capital in private corporations through venture capital investments, growth equity and buyouts.
  • Real estate: Instead of investing all of your money in financial instruments, build up a portfolio of investments in residential or commercial properties.
  • Debt investing: You could invest your capital into the debts of private companies.
  • Hedge Funds: These gather cash from a pool of investors and invest it in a range of risk-managed securities, with the aim of outperforming the market’s current rates of return.
  • Commodities: You can also invest in natural resources such as agricultural products, oil or timber.

Advantages of Adding Alternative Investments to Your Portfolio

Alternative investments behave differently than typical stock and bond investments, and don’t follow the same trends. Because of this, including them in your portfolio is a way to protect against market volatility. Their detachment from the ups and downs of the stock market is probably the biggest benefit they have to offer.

Other benefits of alternative investments include:

  • Lower volatility
  • Opportunities for direct asset ownership
  • Tax benefits such as pass-through depreciation and long-term capital gains treatment.
  • Many alternative investments are strong sources of ongoing income. Real estate, for example, can produce high levels of rental income. Drawing income from bonds or stock dividends can be a lot more difficult than creating sources of cash flow through direct ownership.

Strategies for Integrating Alternative Investments into Your Portfolio

There are three main strategies that are used to diversify portfolios, and alternative assets can be incorporated into all of them:

  • Individual Asset Diversification: This strategy focuses on one particular asset class, aiming to diversify investments across different assets within that class. You may decide to focus on private equity, and then look for a variety of private companies that look like good targets for investment.
  • International Market Diversification: This strategy is about moving at least some of your investment offshore. You could move your money to all kinds of foreign investment targets, both traditional and alternative. For example, you could decide to devote a certain percentage of your portfolio to foreign assets, and then split that proportion between overseas stocks (traditional) and the purchase of real estate in other countries (alternative).
  • Asset Class Diversification: Individual asset diversification is about spreading investments within a particular asset class. Conversely, you may also choose to spread your investments across various asset classes. You could divide your capital across local and foreign stocks, local bonds, private equity and real estate, for instance, creating a diverse mix of different asset classes, both traditional and alternative.

Contact Momentum Wealth and talk to us about our investment management services. Let’s discuss the different tools and approaches, including alternative investments, that we can use to create an investment portfolio that protects and grows your wealth.