Why Diversify?
One of the greatest misconceptions made by individual investors is that portfolio diversification is only achievable by hiring a professional asset manager. On the contrary, diversifying your portfolio is simple, considering the influx of accessible alternative investment platforms in recent years. With the global economy entering uncertain times that echo the 2008 recession, individual investors need to think about how to construct their portfolios in order to reduce risk.
First, consider where the sources of risk in your portfolio may come from. In the traditional 60% stock 40% bond portfolio, the majority of risk stems from the stock market. According to BlackRock, the correlation between a 60/40 portfolio and the S&P 500 over the last 15 years was .98, meaning that its performance will mimic the markets. Although this traditional portfolio may seem diversified, its performance indicates otherwise. Risk diversification goes beyond stocks and bonds. The key to diversification is investing in financial products whose performance does not correlate to the stock market. To reduce risk, spread your wealth over multiple, non-traditional asset classes.
Historically, access to low-correlated, risk diversifiers has been limited to large institutions or ultra-wealthy investors. However, today’s market offers a vast number of alternative investment products that are accessible and perform with far less correlation to the stock market. An in-depth discussion of alternative investments can be found here, but generally speaking, alternative investments fare less during crisis, have an easier road to recovery, and can even outperform the S&P 500. The question becomes, how much of your portfolio should be transitioned into alternative investments?
In a publication by BlackRock, Dr. Christopher Geczy, from the Wharton School, suggests, “Once we move the dialogue into a discussion of risk diversification, alternative investments may legitimately take on a much greater percentage of an individual’s portfolio. I’m not suggesting that all people should copy the Yale model and have almost all of their portfolios in ‘alternatives,’ but I would argue that the percentage for almost everyone should be larger than 10%.”
The “Yale Model” is based on the Yale Endowment that began investing in alternative assets 15 years ago. Today, 90% of the endowment is invested in alternative assets, and grows nearly twice the rate as a traditional 60/40 portfolio. The “Yale Model” highlights the potential of a portfolio diversified with alternative investments, but don’t be to quick to follow suit. Since alternative investments focus on specific asset classes, make sure to consult an expert in the field.
Art assets have little correlation to the stock market, retain more value than traditional assets (specifically during times of crisis) and can return 17% YOY. If you’re interested in learning more about diversifying your portfolio with art, email concierge@arthena.com to schedule a time to speak with art investment expert Madelaine D’Angelo.
