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Headlines
Investing has long been a financial strategy individuals and businesses employ to grow their wealth. The traditional approach to investing typically involves a mix of stocks and bonds, with each proportion varying based on the investor’s risk tolerance. However, a new approach has emerged over the past three decades that has consistently delivered higher returns with less risk. This approach involves the inclusion of alternative investments in the portfolio.
Understanding traditional investment portfolios
Most individual investors and financial advisors build portfolios by combining stocks and bonds. The investor’s risk tolerance often determines the proportion of financial stocks to bonds in a portfolio. Aggressive investors, willing to take on more risk for the potential of higher returns, might have a portfolio consisting of 80% stocks and 20% bonds. Conversely, moderate investors, who prefer a balance between risk and return, might opt for a 60-40 split between stocks and bonds.
The impact of alternative investments
Despite the popularity of the traditional approach to investing, there is evidence to suggest that the inclusion of alternative investments could increase the returns with less risk in every portfolio.
Performance improvement with alternative investments
For instance, an 80-20 portfolio that includes alternative investments can see a modest return improvement with a significant 26% reduction in risk. A 60-40 portfolio can perform half a percent better each year with an 18% lower risk. Even a conservative portfolio can see a 1% per year return improvement with a 6% lower risk.
