For many investors, there is a great deal of trepidation surrounding alternative investments with the thought of them being too volatile or too risky, or as Keith Mooney has heard countless times, designed only for those who are ultra-wealthy. There are many misconceptions about alternatives, and the fact is that they can be beneficial in certain situations.
One lingering misunderstanding about alternatives is that they are new, exotic investment vehicles without long-term track records. “This is a common misconception,” says Lisa Shalett, Head of Investment and Portfolio Strategies for Morgan Stanley Wealth Management. “Alternative investments have existed for decades.” The reality is, alternative investments can offer diversification to a portfolio and mitigate risk. Let’s take a look at some of the misconceptions and the advantages alternative investments can offer:
Alternatives are excessively risky. While it is true that alternative investments have an element of risk, market volatility as a whole is mitigated with an alternative investment, because alternative investments aren’t tied to the vacillations of the traditional stock market. So a traditional drop in the market has little to no effect on an alternative investment which makes them a strategic component of a diversified portfolio.
Alternatives magnify volatility. Alternative investments can be more volatile than stocks or bonds in regards to economic fluctuations, yet overall they are not any more unpredictable. Diversifying a traditional investment portfolio with the appropriate alternatives may actually help reduce overall volatility.
Alternatives have lower liquidity characteristics. Often investors may hold the belief that all alternative investments are illiquid—which also adds to the “risky” perception. However, this risk seems to be balanced by improved returns, as an investor has the opportunity to be compensated with a risk-adjusted return for keeping their capital in the investment for a longer period of time.
We invite you to visit us at mooneylyons.com or call us at 847-382-2600 for more information on alternative investment strategies and how they may fit into your retirement goals.
Demystifying Alternative Investments. 2, June 2016. http://www.morganstanley.com/articles/demystifying-alternative-investments
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Alternative investments 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.
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. No strategy assures success or protects against loss.