Making your money work for you is key to independent wealth. Whatever level you are at, however much your portfolio is worth, maximizing the return on that money provides the growth you need. For many years, the answer to that was simply invested in reliable blue-chip stocks.
They delivered low risk, reliable returns year on year. Today though, we live in uncertain times, and to hedge against such stock market uncertainty, and find ways to achieve higher returns, alternative investments have gained in popularity.
Once the exclusive domain of institutional investors and high net worth individuals, now we see alternative investments in portfolios of all sizes.
They have become accessible to all, from Forex that can be traded from a laptop to private equity funds that open up equity investments to all. While this accessibility has transformed the options for investors the world over, it also presents new challenges.
There are two things to be concerned about. How much alternative investment capital to use, and what to invest it in. For many years, it has been considered best practice to use a ratio of 70:30 for funds.
That is, 70% of funds into stocks, 30% into alternative investments. However, if stock returns fall dramatically, that split of alternative investment capital may no longer deliver the overall performance that investors need.
The issue is, with alternative investments being generally higher risk, focusing more investment funds to them may see higher returns, but also increases risk exposure.
Using alternative investment capital effectively then requires a balance. Moving to a 60:40 split, where 40% of available capital is placed in alternative investments can increase returns, but the increased risk remains a problem.
This can be mitigated though, by using alternative investments that act as a hedge. A good vehicle for this is CFDs, Contracts for Difference, which trade derivatives we generally advise of only 5% to 10% of assets in this type of alternative investment.
Positions can be taken over time that ensures that potential profit is protected across investments as much as possible.
In this way, alternative investment capital can be used to increase overall investment returns, while still retaining a relatively low-risk profile. That is not to say there would be no change in risk because, by their nature, alternative investments offer higher risk than traditional investments. Nevertheless, it is possible to use alternative investment capital to generate increased returns and avoid an extensive increase in risk.
An alternative investment management firm is the ideal option here, offering guidance and advice on the best approach for each investor.
In addition, they can create bespoke investment portfolios that adhere to the risk levels each person is comfortable with. Because the alternative investment options are so diverse, there is perhaps more need for specialized guidance than with any other form of investment today.
They can not only explain the risk and reward in alternative investments but also develop strategies for hedging risk that take a deep understanding of the investment vehicle or asset to accomplish. Alone, few of us have the time or understanding of alternative investments to achieve that.
For the full breakdown on why Australians should invest in Alternative Investments, check out our article: Why Alternative investments should be part of your portfolio?
We welcome you to schedule a time and one of our advisors or give our advisors a call to discuss your investment goals and objectives.
You can call Walker Capital Australia on +61 2 8076 2210, and we’ll see how we can help you achieve your investment goals.