Alternative Investments: Beyond the 60 / 40 Portfolio
At Emerald Asset Management, our primary focus is managing stock portfolios for our clients. Our flagship strategy, called the Global Rising Dividend Strategy, is designed to generate returns through capital appreciation and dividend income. For more aggressive clients we use our Global Capital Appreciation Strategy. But some investors do not want 100% of their investments in the stock market. For more conservative investors, the typical playbook calls diversification using bonds. But for properly qualified investors there are other options called alternative investments. Alternatives can offer another way to diversify your portfolio and potentially achieve higher returns and lower risk. Common types of alternative investments include private equity, private credit, hedge funds, real estate, commodities, tangible assets, and cryptocurrencies.
Why Consider Alternative Investments?
Risk Mitigation: Alternative investments can help to reduce portfolio risk by providing returns that may not be correlated with traditional investments. This means that even if stocks and bonds are performing poorly, alternative investments may still provide positive returns thereby adding another layer of diversification.
Enhanced Growth Potential: Some alternative investments have historically offered higher growth potential than traditional investments. This is because they often invest in assets that are not as closely tied to the overall economy, such as private equity.
Enhanced Income Potential: Alternative investments can also provide enhanced income potential. For example, real estate investments can generate rental income, while private credit investors often enjoy elevated interest rates.
Tax Advantages: In some cases, alternative investments may offer tax advantages. For example, there are real estate exchange programs that allow owners of appreciated real estate to exchange an investment property for access to commercial real estate. In addition to deferring capital gains taxes and eliminating the hassle of managing properties, these programs enable investors to maintain their exposure to the real estate sector while providing opportunities for steady income and the potential for divisibility of ownership units for ease of estate planning.
A key consideration is that most alternative investments are less liquid than stocks and bonds, meaning they can be difficult to sell quickly. Understanding and managing alternative investments can also be more complex than investing in stocks and bonds.
Alternative investments can be a valuable addition to a well-balanced portfolio. However, it is essential to carefully consider the risks, which include liquidity and complexity, in addition to the benefits of alternatives before investing. Consulting with a financial advisor can help you determine if alternative investments are suitable for your specific goals and risk tolerance.
