How many of you reading this have scrolled through a Netflix menu in the past few days? We’re willing to bet it’s a pretty sizable number. Today, most of us take this digital library of thousands and thousands of movie and TV shows for granted. But, as recently as a few decades ago, people looking for entertainment had far fewer options at their fingertips.
Think about it. In the 1950s, for example – sometimes called the “Golden Age of Television” – households with TV sets had only a handful of channels to choose from. Meanwhile, your local movie theater probably had only one or two screens, strictly limiting your choices there as well.
Flash forward a few years, and suddenly consumers had greater choice. One-screen movie theaters expanded into 13-screen multiplexes. Cable TV made it easier to “channel surf” and find something to watch. Movie rental stores like Blockbuster made it simpler for families to go out and pick up a film to bring home.
Add even more time and technological innovations, and that brings us to today – when people looking for a little entertainment have more options, more flexibility, and more choice than ever before. Of course, with all that extra freedom comes some additional layers of complexity, and a slew of new questions. Chief among them: “What are we going to watch?!”
While it’s not an exact one-to-one, the investment landscape has undergone a similar transformation over the past few years. Where once investors’ choices were limited, today there are many different options available, including “alternative” investment opportunities.
Broadly speaking, an alternative investment is an investment in an asset class that is not stocks, bonds, or cash, which are typically thought of as the “conventional” asset classes. There are many different types of alternative investment vehicles available today, including:
- Real estate
- Private equity
- Hedge funds
- Managed futures
Alternative investments have become increasingly popular in recent years – and for good reason. For example, one PwC study suggests that alternative assets show “some of the strongest asset growth in the world.” That same study suggests that “assets in new categories” are growing at a remarkably fast rate (as much as 15 percent per year). Meanwhile, global assets in alternative investments are projected to grow to US$18.1 trillion by 2020, up from $10 trillion just a few years ago.
What’s more, an increasingly robust investment landscape and new strategies are making it easier to invest in alternative assets and strategies, particularly for high net worth individuals.
As the PwC report summarizes it:
“Greater access means that alternatives are becoming mainstream. The surge of investment in alternative assets has made them a central focus in asset management.”
So, why have alternative investments seen such a growth in popularity and accessibility in the first place? The key word is diversification. Investing in alternative assets grants investors greater flexibility, and, in many respects, a great deal of protection from market changes – all along with the potential for generating fairly significant returns.
Broadly speaking, we can trace the popularity and efficacy of alternative assets and investment strategies to three primary aspects:
- Low correlation with more conventional asset classes, such as stocks and bonds
- Ability to lessen the impact of market volatility
- Potential to generate high returns
Let’s explore each of those in a bit more depth.
Correlation is a factor that statistically compares the relationship between two or more types of asset classes. When asset classes have a high correlation, they tend to behave very similarly during a market cycle. With a lower correlation, the asset classes are expected to behave fairly differently. By diversifying your portfolio with asset classes with a lower correlation to one another, you are taking steps to mitigate your overall financial risk. This can shield you from volatility in the market and otherwise safeguard your long-term returns and financial objectives.
Mitigating the Effects of Market Volatility
Markets are always in flux, driven up and down by factors ranging from geopolitics to investor sentiment. In a volatile market, investors may see significant downturns, as their portfolios underperform due to economic factors largely outside of their control. With a more diverse portfolio, including alternative investments, an investor can take some fairly significant steps to shield their portfolio from volatility and risk, including any nasty surprises that may befall the market. Similarly, focusing on alternative investments may help hedge your portfolio against factors such as inflation and changing interest rates.
Capacity for High Returns
As we noted earlier, alternative asset classes have shown remarkably strong growth for some time now. In some cases, a portfolio diversified with alternative asset classes can free up investors from certain short-term worries or challenges and allow them to focus on their overall goals and financial plan. Certain alternative investment strategies also allow consumers to invest their capital and allow it to compound over a longer span of time, which can increase the potential for higher returns in the future.
There’s a Lot to Consider
We’ve barely scratched the surface on alternative investments in this piece. There is much more to discuss, particularly if you’re weighing whether pursuing alternative investment strategies may be a sound choice for you. There are many different factors to weigh and questions to ask, including:
- What are your goals and objectives as an investor, and as a citizen?
- What’s the best way to incorporate alternative investments into your portfolio?
- Do you understand the products you’re investing in? Have you fully assessed the potential for risks and rewards?
- Have you taken into account matters such as taxes, liquidity, estate planning, and so on?
There is much to discuss. If you have any questions or are ready to start exploring all of your investment options, don’t hesitate to get in touch with the talented professionals at FourStar Wealth Advisors.
Four Star Wealth Advisors is a Registered Investment Advisor firm headquartered in Chicago. Whether you are accumulating wealth or investing for income, FourStar Wealth Advisors can help you define what is most important to you and then formulate the strategies that are best suited for your needs. We work closely with each of our clients to select the specific portfolios which we believe are appropriate for their individual goals and risk tolerance.
Please do not hesitate to give us a call at 312-667-1750, or send us a message to begin the conversation.
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This article is provided by FourStar Wealth Advisors, LLC (“FourStar” or the “Firm”) for general informational purposes only. This information is not considered to be an offer to buy or sell any securities or other investments. Investing involves the risk of loss and investors should be prepared to bear potential losses. Investments should only be made after thorough review with your investment advisor, considering all factors including personal goals, needs and risk tolerance. FourStar is a SEC registered investment adviser that maintains a principal place of business in the State of Illinois. The Firm may only transact business in those states in which it is notice filed or qualifies for a corresponding exemption from such requirements. For information about FourStar’s registration status and business operations, please consult the Firm’s Form ADV disclosure documents, the most recent versions of which are available on the SEC’s Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov/