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There’s a lot of talk about diversification these days, but what does it mean? Is diversification just another way to say “don’t put all your eggs in one basket”? Well, yes. In the world of investing, diversification is about spreading money around multiple investments so that when an investment suffers losses, you don’t lose everything.
What is a 60/40 portfolio?
A 60/40 portfolio is made up of 60% stocks and 40% in bonds. This is the most common and traditional allocation for investors who are just starting or those who want to maintain a more conservative approach to investing.
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Stocks and bonds remain the mainstay of most investors’ portfolios, but are the 60/40 portfolio allocations a thing of the past?
The US stock market is one of the best in the world, and it has been since 2009.
The S&P 500 Stock Index (SPX) has grown at an annual pace of 6.6% since that year, outperforming bonds in the same period by 2%. Stocks have outperformed bonds since 2000 and 1990 as well.
In contrast with this strong performance over time, bonds have only grown at an annualized rate of 5% from 1980 to the present day—a modest uptick from their previous performance during periods when they were not beaten out by stocks.
You’re probably aware that stocks and bonds remain the mainstay of most investors’ portfolios, but are the 60/40 portfolio allocations a thing of the past?
But, stocks, characterized by volatility and bonds are not really stable and favorable investments during economic downturns.
So, a lot more people are looking for alternative investments these days.
Alternative investments like real estate can be more suitable for investors than hedge funds or private equity funds because they are easier to understand and less expensive. They also don’t require an extensive amount of time spent researching them (you may not have time to read every company’s annual report). If you’re looking for alternatives that offer diversification among different asset classes—such as real estate investing—options provide a great way to get exposure without having to worry about being overly concentrated in one area at any given time.
Most people think that a 60/40 stock-bond portfolio is conservative
Many people are making the mistake of thinking they need to have 60% stocks, 40% bonds, and cash in their retirement accounts. This is not true because it doesn’t provide enough diversification and risk management opportunities for investors who need help reaching their goals.
Why do investors choose alternative investments?
Many investors have been piling into alternative investments, not because they are convinced of their potential to outperform stocks and bonds, but because they believe they offer protection at bad times.
Do alternative investments mean hedge funds only?
It is important to understand that alternative investments do not necessarily mean hedge funds only.
The good news is that there are other alternative investments and ways to use them as part of your portfolio for diversification purposes.
Which are the most popular alternative investments?
Alternative investments such as commercial and residential real estate can be an excellent way for investors to diversify their portfolios. Unlike hedge funds, which require large investments and charge high fees, real estate, an alternative investment are typically less expensive. They also tend to have lower risks than traditional securities like stocks or bonds because they don’t directly own the underlying assets that make up the underlying assets in other types of investments.
Are alternative investments the best investment right now?
Alternative investments have been around for decades, but until recently were limited mostly to wealthy investors and institutional investors like pension funds and endowments. But as the financial world has evolved, alternative investment strategies have become increasingly popular with average investors looking for higher returns.
Alternative investments are high-risk, high-return investments that include hedge funds, private equity, real estate, and commodities. They’re not for everyone — especially if you don’t know much about them — but they can be an excellent addition to your portfolio if you want to take advantage of the potential rewards without taking on too much risk yourself.
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Alternative investments can provide diversification to your portfolio against economic downturns
Alternative investments are often a good way to diversify an investor’s portfolio, especially for average investors. A 60/40 portfolio includes 60% stocks and 40% bonds, which is generally considered the best combination for long-term investment success.
But in 2022, markets have been hit by persistent inflation and mounting recession fears, producing major headwinds for the 60/40 portfolio.
In short, stocks and bonds are not really favorable investments right now. So, if you’re looking at alternative investments as an addition or replacement to stocks and bonds, they should be considered in conjunction with each other rather than replacing them altogether.
Alternative investments are better than traditional investments when it comes to inflation hedges
Alternative investments are a great way to hedge against inflation. They have a lower correlation with traditional investments, which means that they don’t move in lockstep with each other as stocks and bonds do. This makes them much more tax efficient than their traditional counterparts, so you can enjoy an even higher rate of return on your savings without having to worry about paying taxes on it.
Alternative investments also have different risks and rewards than traditional investments, which may or may not be good news depending on what you’re looking for out of this kind of investment strategy. For example, gold tends to be considered one of the safest currencies around (as long as there’s no hyperinflation), but it does tend toward negative returns over time due to its limited supply factor (i.e., all mined gold has been used). On the other hand, though, platinum is typically considered less expensive per ounce than gold but provides higher returns when compared side-by-side.
When it comes to fighting inflation, real estate and other types of alternative investments are some of the best options or “weapons” you can choose from
Real estate has been a great inflation hedge for many years now. The asset class is unique in that it’s a tangible asset that provides economic benefits over time and is not subject to swings in a short-term performance like stocks or bonds can be. It also offers long-term stability as well as liquidity when needed (i.e., if you need cash quickly).
Finally, real estate offers tax advantages over other assets, such as stocks/bonds since they generally don’t appreciate at the same rate as houses over time – so there’s no question about whether those gains should be taxed at capital gains rates versus ordinary income rates!
Real estate has outperformed stocks and bonds in times of high inflation.
Real estate is a better inflation hedge than gold, and it’s been a good one for over 100 years.
To summarize
It is important to understand that alternative investments do not necessarily mean hedge funds only. Many fund managers are using them to build diversified portfolios with greater asset allocation flexibility. The most popular alternative investment products are real estate and exchange-traded funds (ETFs), which can be constructed by sizing down a traditional index fund or adding new holdings through ETFs that hold stocks, bonds, or other asset classes with different risk profiles than their parent index.
You must have concluded after reading this post that one of the best investments you can make in 2022 is real estate! Invest right away with Assetmonk.
60/40 portfolio, a long-gone classic: Alternative Investments, A Must-Have In Investors’ Portfolio FAQs
What is a 60/40 investment portfolio?
The so-called 60/40 allocation is one of the most traditional investment methods. The idea is that by investing 60% of your portfolio in stocks and 40% in bonds, you get the right balance: strong growth prospects from your riskier equities and safety from your more conservative bonds.
Real estate is the perfect alternative to the 60-40 portfolio.
