Alternative, as opposed to traditional, investments are part of a more advanced investment strategy.
1. They exhibit higher volatility than things like stocks or bonds, and as such should not make up more than a fairly small portion of a risk averse portfolio.
2. For that reason, it is important to build up a solid, risk averse portfolio before diversifying into alternatives, which are often less than perfectly correlated with the market as a whole.
3. This makes them good additions to have, particularly during market downturns, when assets that are countercyclical to the economy become more valuable.
So what does this asset class actually comprise? Well, pretty much anything other than stocks, bonds, cash, and real estate. This can include private equity or venture capital, hedge funds, futures and options and cryptocurrency. It can also include physical assets like paintings and art, as well as commodities like steel, iron and gold. The risk and return profile of each of these is idiosyncratic, which makes them the perfect vehicles for diversifying a portfolio.
Pieces of companies in private markets. Private Equity & Venture Capital
Cryptocurrencies & options on future values of company equity
Paintings and other art, and ownership of commodities
Of course, there are limits to what we can tell you - we’re not in the business of dishing out financial advice, but that’s ok because each person’s asset allocation should be unique to their idiosyncratic needs.
This is vital - it's the action step, so we can't do it for you!
Your asset allocation will also change over time with your capacity for risk, with more or less responsibilities and less and less time until your target retirement date.
How Can I Decide How Much to Allocate to Traditionals vs Alternatives?
This isn’t something we can recommend: it very much depends on your capacity for risk, given that risk and return are so well correlated. However, we can certainly point you in the direction of some more information, starting with our blog post on the subject.
How Do I Know Which Alternatives Are Right for Me?
Are all Cryptocurrencies part of the Traditional Asset Class?
Yes. Now, there is obviously an increased risk involved in investing in smaller coins, which exhibit a more aggressive risk profile - it's probably best to only put money into large caps to begin with, and ones you're comfortable about understanding.
How do I know when to Rebalance?
What can I do next?
When investing as part of your financial planning journey, it's important to remember that the value of your holdings can go down as well as up over time. It's vital that you are comfortable with the level of risk you are taking on, and this will dictate how you allocate your resources between asset classes.
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