How to Build a More Resilient Portfolio with Alternative Investments

Written by: Millennium TrustMillennium Trust

Measures taken to combat COVID-19 bumped U.S. equities out of an 11-year bull and into a bear market at breakneck speed. The shocking pace of change left investors across the risk spectrum reeling with uncertainty.

Now that short-term panic has subsided, many are actively looking for investment strategies that can help protect assets in times of intense volatility. One tried-and-true strategy is diversification.

Many investors diversify by investing in three well-known asset classes: equities (stocks), fixed income (bonds) and cash. However, it is possible to diversify more broadly by adding alternative assets to these portfolios.

“Alternative investments” is a broad category that describes several different types of investments. Typically, real estate, precious metals, commodities, hedge funds and private equity and debt all are included in the alternatives asset class.

Building a resilient portfolio

For more than 30 years, U.S. Treasuries and sovereign bonds have been considered “safe haven” investments that provide income, protect capital and offer potential for capital appreciation.

Now, with yields near zero, the risk and reward profile of bonds has changed. As a result, investors are reassessing the role of bonds in their portfolios and comparing the potential of various safe haven alternative assets.

J.P. Morgan Global Strategist Thushka Maharaj and his colleagues wrote,

“Diversification across assets is central to the construction of resilient portfolios…The good news is, investors may have more choices for building protection and resiliency into their portfolios than they think. Expanding the concept of safe haven assets to include not only bonds, reserve currencies and gold but also selected alternative assets is a good starting point.”

Blending traditional and alternative investments in a portfolio – with an asset allocation that makes sense for your specific strategy and goals -- can help mitigate losses when the market moves lower, and capture gains when the market moves higher. However, diversification does not prevent loss or guarantee gains.

Self-directed IRAs offer a tax-advantaged way to invest in alternative assets.

One way to invest in alternative assets is through self-directed IRAs. Investors who invest through self-directed IRAs receive the same tax advantages they would investing through regular IRAs.

The main difference is that a self-directed IRA reserves investment authority to the account owner and enables investors that hold alternative investments in self-directed IRAs to maintain control and flexibility over their investments.

Generally, self-directed IRAs are available through specialty custodians, like Millennium Trust. If you would like to learn more about alternative assets and investing with your retirement account, download our eBook, “Are Alternatives Right for Your Portfolio?”

Alternatives are not for everyone, so be sure to speak with your financial advisor to understand what is best for your long-term investment strategy.

The material in this blog is presented for informational purposes only. Millennium Trust Company performs the duties of a directed custodian, and as such does not offer or sell investments or provide investment, legal or tax advice.

Related: Is There Reason to Be Optimistic on Real Estate Now?