The Benefits of Alternative Investments: Diversify Your Portfolio for Greater Potential

What Are Alternative Investments and Why Should You Care?

According to Finzace’s 2024 Investment Diversity Report, 78% of high-net-worth individuals now allocate at least 25% of their portfolios to alternative investments. But what exactly are these “alternatives,” and why are they becoming the cornerstone of modern investment strategies?

As Warren Buffett famously said, “Diversification is protection against ignorance. It makes little sense if you know what you are doing.” However, even the Oracle of Omaha understands that smart diversification—including alternative investments—isn’t about ignorance; it’s about intelligent risk management.

Quick Answer for Busy Investors: Alternative investments are non-traditional assets like real estate, private equity, commodities, and hedge funds that typically have low correlation with stock and bond markets, offering better diversification and potential inflation protection.

The 5 Game-Changing Benefits of Alternative Investments

1. Market Correlation Reduction: Your Portfolio’s Insurance Policy

Traditional stocks and bonds often move together during market crashes. According to Finzace analysis, during the 2020 market downturn, portfolios with 30% alternative investments experienced 40% less volatility than traditional 60/40 portfolios.

Why This Matters:

• Real estate doesn’t crash when tech stocks tumble
• Commodities often rise when currencies fall
• Private equity operates on different cycles than public markets

“The four most dangerous words in investing are: ‘This time it’s different.'” – Sir John Templeton. Alternative investments help ensure that even when markets behave differently, your wealth remains protected.

2. Enhanced Portfolio Diversification: Beyond the Basic Mix

Finzace’s diversification framework reveals that true portfolio resilience comes from spreading investments across:

• Real Estate Investment Trusts (REITs)
• Private Equity and Venture Capital
• Hedge Funds and Managed Futures
• Commodities (Gold, Silver, Agricultural Products)
• Infrastructure and Energy Projects

Pro Tip from Finzace: The “Alternative 20 Rule” suggests allocating 15-25% of your portfolio to alternatives for optimal risk-adjusted returns.

3. Superior Return Potential

Harvard Management Company, which manages Harvard University’s endowment, allocates over 70% to alternative investments. The result? They’ve consistently outperformed traditional portfolios over the past two decades.

Finzace’s 2024 Performance Study shows:

• Private equity: 12-15% annual returns over 10 years
• Real estate: 8-12% with inflation protection
• Hedge funds: 6-10% with lower volatility

As Peter Lynch noted, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” Alternative investments help you profit regardless of market direction.

4. Inflation Protection: Your Purchasing Power Guardian

Ray Dalio, founder of Bridgewater Associates, emphasizes: “He who lives by the crystal ball will eat shattered glass.” But one thing we can predict? Inflation’s erosive effect on wealth.

How Finzace’s Alternative Investments Beat Inflation:

• Commodities: Gold has maintained purchasing power for over 2,000 years
• Real Estate: Property values and rents typically rise with inflation
• Infrastructure: Toll roads, utilities, and energy projects have built-in inflation adjustments
• TIPS and I-Bonds: Government-backed inflation protection

Historical Fact: During the 1970s inflation crisis, traditional portfolios lost 20% of purchasing power while commodity-heavy portfolios gained 15%.

5. Unique Opportunity Access

Private Markets:

• Pre-IPO companies with explosive growth potential
• Distressed assets at significant discounts
• Direct real estate development projects

Emerging Sectors:

• Renewable energy infrastructure
• Cryptocurrency and blockchain ventures
• Art, collectibles, and intellectual property

As venture capitalist Marc Andreessen says, “The next big thing will start out looking like a toy.” Alternative investments give you access to tomorrow’s giants before they become today’s headlines.