An allocation to alternatives offers many potential benefits; the single most important one is diversification.
Diversification is an investment strategy that focuses on managing risk by including a wide range of assets within a portfolio. The idea is that different assets tend to behave differently at different points in time.
For example, in the past, equities and bonds tended to move in opposite directions. If you put all of your money into equities, your portfolio would grow and shrink with equity markets. However, if you added bonds, then when equities fell, your portfolio wouldn’t fall at the same rate because the bonds you own would rise.
Unfortunately, the correlation between stocks and bonds is now increasing, which means that they are rising and falling together.1
Unfortunately, the correlation between stocks and bonds is now increasing, which means that they are rising and falling together.1 This is bad news if you have a traditional 60/40 portfolio; it means you won’t reap the rewards of diversification.
In addition, because they have lower correlation to bonds and equities, alternatives may help enhance portfolio diversification. By adding uncorrelated alternatives to a 60/40 portfolio, you can truly incorporate assets that behave differently. This may boost portfolio performance, especially during equity market downturns, and lower overall portfolio volatility.2
Alternatives may help you build a more robust and lower risk portfolio, and that means a better approach to investing.
* Past performance is no guarantee of future results.