Thoughtful portfolio construction requires a focus on an investor’s goals and financial risk tolerance. By taking these considerations into account, investors can make more-informed decisions regarding the role of alternatives in their portfolios.
With longer life expectancy and uncertainty surrounding the future of social security, investors are seeking ways to enhance the predictability of their retirement income. Alternative investments tend to pay higher levels of income that is uncorrelated to the equity and fixed income markets, which can help meet their needs for consistent retirement income.
A diversified portfolio can help smooth the impact of market volatility on an investor's portfolio, which can help to reduce emotional reactions to short-term market fluctuations. Alternative investments tend to behave differently than traditional investments in an investor's portfolio. For this reason, diversification is the #1 reason advisors recommend alternative investments.
Alternative investments have the potential to enhance the risk and return profile of a portfolio. Given their ability to be more flexible and invest in a more extensive set of opportunities, they can potentially enhance returns by growing and preserving capital.