Are So-Called Liquid Alternatives Right for your Portfolio?
Considering that the financial crisis is still going on, many investors are afraid of diversifying their portfolio. Most of them choose to pour their cash into investments that seem safe, namely ETFs and mutual funds.
That’s mostly because these offer a great potential for diversification without too much risk involved. Liquid investments are winning more ground, and current market trends have actually managed to convince investors that they’re predisposed to becoming profitable.
However, a portfolio dominated by liquid investments may come with a set of additional risks, including extra fees and dissatisfying returns.
Liquid alternative investments – a constant hunt for diversification
Commonly known as ETFs or mutual funds, liquid investments deliver strategies that are unconventional. That’s one of the main reasons investors are so fond of them.
Liquid alternatives: A better mousetrap?
Once preferred by acclaimed investors (because of increased initial investments), at a worldwide stage they’re jumped from $100 billion (2008) to over $500 billion (2014).
Their reputation is reflected by the turmoil a lot of investors had to endure with their bond and stock portfolios over the past 20 years.
Many investors are no longer willing to take foolish risks. They’ve learned (by making mistakes) that risk and portfolio return have been ruled by equities, which is a type of asset susceptible to significant drawbacks.
Even though a traditional portfolio features 60% capital (allotted in equities) the risk that comes with such an investment is almost entirely driven by equities; which by the way, are a lot more volatile and risky than bonds. In spite of the fact that this can trigger stronger performance levels throughout equity bull markets, there are high chances for their portfolios to be severely to weaknesses.
Portfolio diversification – a move meant for the strongest investors
Unstable correlations have compelled many investors to stop diversifying their portfolios. For instance, the increasing connection between bonds and stocks throughout 2013 has left investors worried about the capacity of fixed income allocations to branch out the equity risk of an investment portfolio.
Whether we like it or not, these market drawdowns have been happening for the past 15 years and have led to much lower profit margins than in the 80s and 90s. The investment market today yields lower returns on investment.
Investors are afraid to spend but still interested in growing. In the long-term, the fear of investing in liquids will greatly affect the investment market at a global level.
Amid a multitude of investment tactics and strategies, it’s not that simple to define liquid alternatives. To many, this form of investment is not necessarily related to bonds and stocks; first, because they’re accessible and second, because they have potential.
Commodities for example, are a form of alternative asset class. Together with emerging market currencies, they might feature returns providing that investors are willing to take a risk.
The perks of alternative investment strategies
Most common strategies adopted when investing in alternatives are actively handled and are not dependent on conventional benchmarks.
These tactics may render diversification via the individual security selection of a manager, however with less dependence on bond and stock exposure as far as delivering returns is concerned. Some examples of alternative investing tactics: equity long, short & managed, and returns on fixed income.
Portfolio considerations
Liquid alternatives are predisposed to various risk factors, which reflect many asset classes, manager strategies and styles. Generally speaking, it all comes down to how much you can afford to invest.
Seeking safe havens? Analysts, advisors point to liquid alternative …
An alternative investment in fine wine for example, comes with pros and cons. Usually, an investor fails to see returns because of a bad call. If you’re new to this market and you’re not informed, you risk losing more than winning.
Why does that happen? Because you can’t jump in with a lot of cash and expect for your investment to double without knowing the risks involved.
Rather than do everything by yourself, it’s best to take precaution measure. A fine wine investment manager or merchant can help you make an informed decision. The exact same thing goes for all other types of investments.
When your goal is to diversify your portfolio, it is critical to understand that investing in wine takes time and patience. The more you can understand how this market work, the higher chances you have to see a profit.
Category: Investing
What on earth is this article on about it is complete nonsense!!! I am qualified to make such remarks “unstable correlations” what is this there is no such thing either asset classes are negative or positively correlated there is no liquid alternatives all investments have degrees of liquidity cash being highly liquid where as physical assets such as physical property have very low levels of liquidity…this article does not provide insight only confusion and the author doesn’t have a clue. Commodities are not alternative assets far from it they are e.g. Gold, Oil, Water, Wheat, Cotton etc. The very thing countries export import consume daily in industry and used by individuals they are volatile but are negatively correlated and therefore represent a way of diversifying ones portfolio. Fees and attributed costs are not a risk they are cost for obtaining expert insight or a cost of doing business the same as shopping where is the difference if you can grow a swede you will never have to buy one again if you cant and you are partial to a swede then you pay Tesco’ a price to obtain one very very simple concept and certainly not a risk.The “fear of investing in liquids” this is laughable all asset classes have varying degrees of liquidity as I mentioned above, high liquidity is crucial to how the global economy works without it, it is called the stone age really this is what is considered expert commentary no wonder people are getting no where with their investments when this is whats on offer.