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Diversify Your Portfolio with Alternative Investments

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In the ever-shifting landscape of financial markets, the once-reliable 60/40 portfolio faced unprecedented challenges in 2022, staggering under the weight of inflation and market volatility. Traditional correlations between stocks and bonds faltered and surged past the 60% mark, a departure from the norm that sent shockwaves through portfolios. However, amidst this turbulence the alternative investment space has proven to be a beacon of hope for investors. These unconventional assets, often overlooked, have proven to be the secret sauce for portfolios seeking stability and superior returns in uncertain times.

The Turbulent Shift in Portfolio Dynamics

2023 brought ease to investors with a 7% return in the 60/40 portfolio. Yet, the market remained choppy, with geopolitical tensions, health crises, and uncertain Federal Reserve decisions tossing waves of volatility. Rising interest rates compounded the uncertainty, potentially devaluing both bonds and stocks. In response, the call for a shift in portfolio strategies echoed louder than ever.

Rethinking Portfolio Strategies

Effective active management in alts is crucial to derive better risk-adjusted returns due to their unique market characteristics. JPMorgan's research indicates that incorporating alts improves the Sharpe ratio, enhancing risk-adjusted returns across various portfolio compositions. The endowment model, famously seen in institutions like Yale, emphasizes higher exposure to alternative investments due to their low correlation and long-term benefits. While historical data suggests diversification through alternatives offers benefits, it's essential to note that past performance doesn't guarantee future outcomes.

Benefits of Alternative Investments

Alternative investments demonstrate smaller maximum drawdowns compared to traditional 60/40 portfolios, showcasing their potential risk mitigation qualities. For example, real estate assets historically captured inflation through leases, offering stability, especially in multifamily sectors. These allocations have shown benefits in both high and low inflation scenarios, contributing to portfolio performance and diversification.

Market Trends and Projections

The market share of alternative investments has significantly increased, with expectations of further growth, highlighting their rising importance in investment strategies. The accessibility to these investments has also expanded, democratizing access through various platforms. According to the CAIA Association, the share of alternative investments nearly tripled from 2004 to 2018, and by 2025, it's projected to account for 18% to 24% of the total market.

Navigating Uncertainty: Integrating Alternatives

In times of uncertainty, evaluating available alternative options becomes crucial for investors to adapt to changing market conditions and achieve their investment goals. Institutional investors are increasingly integrating alternatives into long-term strategies, influencing the broader investment landscape.

In a realm where market certainties have become elusive, alternative investments stand tall as the unsung heroes of portfolio resilience. They offer a lifeline and avenue to diversify, safeguard, and potentially elevate portfolios, defying conventional norms and guiding investors through turbulent financial waters.

- Kondwelani Kalinda, Associate Investment Advisor

Kondwelani Kalinda is an Associate Investment Advisor at Endeavour Wealth Management with iA Private Wealth, an award-winning office as recognized by the Carson Group. Endeavour Wealth Management provides comprehensive wealth management planning for business owners, professionals and individual families.

This information has been prepared by Kondwelani Kalinda who is a Associate Investment Advisor for iA Private Wealth and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained here in may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.

iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.

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