Written by: 361 Team
As advisors seek to preserve the risk/return profile that the 60/40 portfolio has historically delivered amid the low interest rate environment, they will need to consider adding new investment strategies to the mix. Adding alternatives can help achieve this objective.
Below are some frequently asked questions we’ve received from advisors on alternatives.
1. Where do alternatives fit in my portfolio and how much should I incorporate?
It’s important to remember the alternatives slice of your portfolio is meant to work in conjunction with your traditional long-only assets. Though they will outperform from time to time, your alternative allocation isn’t meant to beat stocks and bonds. It is meant to be a third leg in your portfolio that when combined with equities and fixed income, may help you achieve a better return with lower volatility over time. The ‘how much to add’ question just comes down to math, which we laid out in an article.
2. How do I evaluate alternative funds?
We’ll admit it can be more complicated than your average long-only due diligence process, and category classifications aren’t always what they seem. The stark contrast in fund characteristics within alternative categories mean advisors must look beyond rankings or performance numbers and ask what they want the alternative fund to achieve within a broader portfolio. Alternative strategies can provide value for clients, but only when the individual fund characteristics are understood and matched with appropriate expectations.
3. Why should I consider adding alternatives?
Quite simply, because while we can’t predict the next 10 years (although the clear theme we’ve seen is that expected returns for the next 5-10 years are lower than we’ve been accustomed to historically), the best thing you can do is build a portfolio that’s prepared to withstand changing market environments right now.
4. How can I rebalance to take advantage of more attractive valuations in other asset classes?
It comes down to risk budgeting. Our back-of-the-envelope calculation shows how risk budgeting works and the understated role alternatives can play in bringing portfolio risk back into balance. You can bring your portfolio back to its original risk level, without sacrificing the portfolio’s return potential.
5. Alternatives can be difficult to explain to clients. How can I easily emphasize the importance of alts to my clients?
We understand this hurdle with alternatives. For many, this is a smaller piece of their clients’ portfolios, so it can be difficult to explain the importance of alternatives to clients. That’s why we created this interactive portal to provide talking points for client conversations, downloadable charts and presentations, implementation ideas and more that you can share with clients.