Alternative Assets Are Key to Diversifying and Protecting Against Inflation
It used to be the case that a 60 percent equities and 40 percent bonds portfolio was the standard for a diversified collection of investments. For decades, the 60/40 portfolio was presented as a decent, reliable way to maximize your chances of a healthy return and ensure some diversification.
Historically, diversification within equities and bonds was considered adequate protection from inflation. But the last year has shown us that those days are over.
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Alternative assets may be especially useful in diversifying and protecting against inflation specifically because whilst stocks may protect against long-term inflation, bonds remain vulnerable.
Not only this, but even though a 60/40 portfolio may look diversified at first glance, its behavior can be extremely similar to that of equities when looking at holistic portfolio performance.
Now, attenuating market volatility requires RIAs and Accredited Investors to take new approaches. Although it is impossible to predict, even once inflation has passed its peak, experts expect it to stabilize at a higher level than before. This means that the utility of bonds in balancing out the risks associated with higher-volatility equities is not as strong.
It is only in economic environments of both low inflation and falling interest rates that bonds offer any opportunity to offer a return on investment. That is not the environment we are in.
Consequently, RIAs, and Accredited Investors need to think about what they can do to make the defensive side of a portfolio more resilient without making the overall risk of a given portfolio too much greater.
It is here that alternative assets may offer a vital addition to an investment strategy that could bring real diversification and offer useful protection from inflation.
Alternative assets are low-correlation assets. Simply, this means that the activity of alternative assets does not tend to mirror the activity of the stock market.
Low correlation assets can be a benefit because whilst the S&P 500 is contracting and bonds no longer offer the counterbalancing properties that they have done in the past, alternative assets can continue to grow in value and bring capital appreciation to their investors.
Because alternative assets can provide exposure to investment instruments that do not usually behave in the same way as the stock market, they allow investors to engage in true risk diversification.
Risk-based diversification specifically seeks de-correlation with other portfolio assets to achieve “real” diversity, rather than the appearance of it – as in the 60/40 portfolio spread.
Alternative assets include:
- Commodities like gold
- Crude Oil
- Aircraft leasing
- Listed infrastructure securities
- Wind farms
- Contemporary art
- Collectibles such as baseball cards or whiskey
- Merchant Cash Advances
We specialize in Merchant Cash Advances as a unique form of alternative asset.
We explain exactly what MCAs are here, and we also lay out why they can be so powerful during an economic recession here.
If you are interested in talking with an expert on how MCAs might help you diversify your portfolio and protect against inflation, we would be very happy to hear from you. You can contact us via email here.