Lesson type: Understanding diversification

Looking for diversity

As traditional asset classes start to lose value, advisers must turn to diversification and alternative assets to stabilise performance in client portfolios

The two final episodes of the Investment Series 2 are focused on Ross Bark, a Gen X investor who is looking for further diversification in his investment portfolio due to his heavy weighting towards property. We now outline for you a brief overview of Diversified or Alternative Investments and how they generally operate within a client’s portfolio.

Investors may consider including some ‘alternative’ investments in their portfolio in order to provide diversification (or points of difference) from traditional assets, such as equities and fixed income.

We categorise some investments as ‘alternative’ because they tend to perform quite differently to, or contrary to, how mainstream assets are performing. For example, when traditional assets are performing poorly and declining in value, ‘alternative’ investments can perform more strongly and in some cases, even deliver positive returns.

Conversely, ‘alternative’ investments may not do as well when traditional assets are performing well. As we know, all asset classes and investments will experience positives and negatives and therefore, ‘alternative’ investments can play a useful role in diversifying or spreading the return and risk within an investor’s portfolio.

In order to produce an investment that delivers outcomes that are quite different to traditional assets, ‘alternative’ investment managers will invest in asset classes and/or apply trading strategies that result in their portfolios performing differently to traditional assets.

While it is easier to generalise about the likely return and risk profile of traditional asset classes such as equities, ‘alternative’ investments come in many different guises and are certainly not homogeneous in nature. Some investments are high risk/high return strategies, while some are more conservative in nature.

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