Why Every Portfolio Needs Alternative Investments Now

It has never been more important for investment portfolios of all types, sizes, and risk appetites to make material allocations to Alternative Investments.

Accumulating investment capital is typically the result of painstaking, decades-long effort. Such a legacy of hard work, thrift, and careful stewardship needs and deserves to be properly protected, to be all-weathered against ever-emerging threats and sudden downturns.

Significant, Undervalued Risk

Many investors have been lulled into a false sense of security after a protracted run-up in the public equities market over the last several years. Meanwhile, volatility, or market risk due to external and geopolitical events, has notably returned. In tandem with a deeply concerning macro backdrop, many investors have been left woefully susceptible to sudden, significant downturns which can wipe years or decades worth of investment gains off the values of their portfolios. Recovery from such a hit can take as long as five to ten years or more. Indeed, a 40% decline in a portfolio’s value, for example, subsequently requires an almost 70% gain just to get back to where that started. The recent, rapidly retreating bull markets have made investors numb to the very real risks at hand.

Indeed, many investors are underappreciating the degree of geopolitical risk and potential instability in many key developed and emerging economies around the world; leading housing markets have slowed notably; worldwide indebtedness is up dramatically while credit quality has fallen precipitously; equity valuations well exceed pre-crisis levels; growth has slowed; and global trade is markedly less efficient. Caution should decidedly be the watchword of every investor.

What Are Alternative Investments?

Regardless of an individual investor’s risk appetite, no portfolio is today properly diversified, particularly against the return of volatility, without meaningful allocation to Alternative Investments. In contrast to Traditional Investments (public equities and fixed income), Alternative Investments are simply investments that typically have a lower correlation and lower volatility, relative to public markets. The universe of Alternative Investments is large and growing, but its classic sub-asset classes include private credit, real estate, private equity, and hedge fund strategies. A simple way to think of Alternative Investments is that they are almost any investment that is neither public equities nor fixed income.

Why Portfolios Need Alternative Investments Now

Modern Portfolio Theory – first published almost 70 years ago in 1952 – heralded the Traditional diversifying portfolio allocation of 60% equities, 40% fixed income. But the 60/40 portfolio was devised at a very different time with less complicated financial markets and vastly fewer investment products. The 60/40 approach fundamentally expected moderate growth from equities with a consistent shock absorber in fixed income. This “starting point” approach for many portfolios’ asset allocation is inherently insensitive to the critical contemporary reality that fixed income allocations alone no longer properly diversify equities exposure and risk.

This shift has been driven by a host of factors, not least that particularly since the 2008 financial crisis, Central Banks have kept interest rates artificially low, encouraging the corporations o