Déjà vu all over again. We have been here before, specifically in 2011. I am referencing a debt...
The Effect of Alternative Investments on a Portfolio
With pre-election market jitters in full swing, I would like to highlight one of the key strategies that we use at Virtus Wealth Management to weather stock market volatility.
On June 8, 2016 Bloomberg published an article that Goldman Sachs Managing Director sees an elevated risk of a market sell off, highlighting a time of potentially heightened stock market volatility. Nobody has a crystal ball and it is impossible to know for sure what the market will do, however, when it comes to a majority of our clients, they prefer to protect their portfolio from downside risk rather than try to earn maximum returns. A primary key to trying to protecting a portfolio from large swings is through diversification. Diversification is the concept of using several different asset classes within your portfolio that have little to no correlation with one another. This goes well beyond your traditional asset classes of stocks, bonds, and cash. Any asset class that is not considered stocks, bonds, or cash is technically classified as an alternative investment. This term covers such a large universe of different investments so I cannot cover them all in this article, but the idea is using several alternative asset classes that have little to no correlation with the stocks and bonds in your portfolio that work together to try to minimize the risk given a desired rate of return.
This is not a new concept, the use of alternatives in an investment portfolio has been the backbone of several large institutions such as the Yale and Harvard Endowment Funds. However, more recently, alternative investments have become available to individual investors and not just large institutions. A recent chart from JP Morgan’s Guide to the Markets on March 31, 2016 does a great job of illustrating the benefit of allocating a portion or your portfolio to alternative investments versus a traditional portfolio of just stocks and bonds over the past 25 years.
This chart shows that over this 25 year period, adding a 20% allocation of alternative investments to a traditional portfolio of just stocks and bonds increased the portfolio’s return and decreased the volatility. They are not huge differences between the returns and volatility percentages, but if we have the potential to increase return while taking on less risk over a long term period, why not take advantage of that?
We now have the ability to bring institutional investment strategies to individual investors. Research shows that such strategies provide long term investors an opportunity to lower the amount of risk they take without giving up potential returns. If you do not own any alternative investments in your portfolio we believe now is as good of a time as any to consider doing so. If you would like to learn about specific alternative investment strategies that we use or would like us to analyze your portfolio’s use of alternative investments please contact our team of Wealth Managers here at Virtus Wealth Management.
Alternative investments and strategies may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses. Stock investing involves risk including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Correlation is a statistical measure of how closely two securities move in relation to each other. A high (positive) correlation implies the securities generally move in a similar direction, whereas a low (negative) correlation implies the securities generally move in opposite directions. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.