Do Alternative Investments Have a Place in Your Portfolio?

October 12, 2021

There are a lot of great reasons to invest in alternative investments. Here’s why it’s time to make them a part of your portfolio.

Did you know that the average institutional investor has up to 30% of their portfolio in assets beyond stocks, bonds, and mutual funds? In other words, only about 70% of their portfolio is invested in assets that everyday investors are familiar with, which sounds like a lot until you realize that the average individual investor has 95% of their portfolio in stocks.

So, what’s all the fuss about? And should the average investor take their cues from institutional investors and rework their portfolios?

You shouldn’t invest like an institutional investor unless you actually are, but there are plenty of other great reasons to invest in alternative investments. Here’s a look at a few of them.

What are Alternative Investments?

Alternative investments are any investment that doesn’t fall under one of the three conventional investment categories:

  1. Stocks
  2. Bonds
  3. Cash

For this reason, alternative investments aren’t an asset class so much as an umbrella term for a huge variety of asset classes and investments. Some common alternative investments include:

  • Fine art
  • Real estate
  • Private equity
  • Private debt
  • Hedge funds
  • Gold
  • Derivatives
  • Cryptocurrency
  • Tax liens
  • Structured settlements

As you can see, these can be tangible assets (like land) or intangible assets (like derivatives). That means that alternative investments have wildly diverse characteristics—it really depends on what you’re interested in. This also means that alternative investments tend to have a niche market of interested investors. You can find a market for Big Tech stock anytime, but a Manet has a much smaller group of interested buyers.

Reasons to Invest in Alternative Investments

So, what’s all the fuss about alternative investments?

While alternative investments can often feel like comparing a raven and a writing desk (or an 80-year-old bottle of wine and a Cezanne still life), they do have a few key features in common—and those make them quite attractive to savvy investors.

Low Market Correlation

As an average investor, you’ve already experienced the joys (and pains) of the stock market. The average historical return has held steady at 10% for the last century, but as any investor who outlived 2008 knows, averages leave a wide margin of error. And the years that aren’t average can be hair-raising.

Just look at 2020, which was a historic market year for reasons we would all rather forget.

One key feature that most alternative investments have in common is that they have low (or no) correlation to stock market performance. Some assets, like gold or fine art, retain their value regardless of market performance because they derive value from inherent physical qualities. Others, like hedge funds, are designed to profit regardless of whether the market swims or sinks.

For this reason, alternative investments are a fantastic choice for diversification—and the top U.S. investment advisors choose alternative investments for that reason.

To be clear, this does not mean that alternative investments don’t change relative to the stock market. It just means that they don’t correlate with the market. That’s not a bad thing as long as you have the financial sophistication to know what you’re getting into.

Less Volatility

2020 was a rough ride, and investors are getting tired of riding the market like a roller coaster.

Unfortunately, volatility is one of the key features of stocks. They may trend up or down from one minute to the next depending on company performance, a competitor’s performance, a news event in the industry, or simply what investors are willing to pay for the stock price. As 2020 shows, there’s no good way to predict when volatility might go off the rails.

One thing that most alternative investments have in common is that they tend to be fairly illiquid. The market is more niche and turnover is less frequent, which means that while there is market-driving information, it doesn’t drive price changes as rapidly as anything you might see in the stock market.

Hedge Against Inflation

Is a dollar today worth the same as a dollar ten years ago? In theory, a dollar bill still represents the same unit of currency. But thanks to inflation, that dollar doesn’t buy you as much as it did ten years ago, and like volatility, there’s no good way to predict how inflation will perform over time.

This is why many investors rely on alternative investments as a hedge against inflation.

Assets that hedge against inflation are generally expected to hold their value, regardless of the market. In fact, they tend to outperform the market in inflationary times. A smart investor can leverage these assets to make the most of their value when inflation goes up. This is how your portfolio can thrive even when inflation comes knocking.

Let’s Make Your Portfolio Stronger

There are plenty of great reasons to invest in alternative investments—as long as you’re using them for the right purpose and you’re smart about leveraging them.

At Masterworks, we’re here to make the exciting world of blue-chip art accessible to everyday investors like you. After all, blue-chip art has outperformed the S&P 500 by 180% from 2000 to 2018. And on our platform, you don’t need the last name Bezos to participate—you can purchase shares in multi-million-dollar art for as little as $20 per share. We take care of the research, authentication, and auction process for you, so all you have to do is find shares in art you love. Ready to get started? We’re ready to make alternative investments work for you. Fill out your membership application today.

Masterworks is a fintech company democratizing the art market. Our investors are able to fractionally invest in $1mn+ works of art by some of the world's most famous and sought-after artists.