Why Alternatives Belong in Your Portfolio Asset Allocation

When most investors think about building a portfolio, the conversation tends to circle around the traditional building blocks: stocks and bonds. And for good reasons; They’ve long been the backbone of wealth creation and stability. But as markets evolve and personal goals become more nuanced, relying solely on these two pillars may leave your portfolio vulnerable. This is where alternative investments come in.

What Do We Mean by Alternatives?

“Alternatives” is a broad term that includes assets outside of the traditional stock-and-bond universe. Real estate, private equity, infrastructure, hedge funds, commodities, and even newer strategies like private credit, music royalties, or farmland investing all fall under this umbrella. These aren’t meant to replace your core holdings but to complement them, offering characteristics that can help strengthen the foundation of your financial future.

The Role of Alternatives in Asset Allocation

Diversification Beyond the Basics

Diversification isn’t just about holding multiple stocks or adding bonds for balance. True diversification means adding assets that behave differently than public markets. For example, real estate may thrive in an inflationary environment, while private credit, like mortgage loans, can offer steady yields even when equity markets stumble. By introducing alternatives, you reduce the reliance on any one economic outcome to determine your portfolio’s success.

Smoother Ride Through Volatility

Markets will always have periods of turbulence. Alternatives, because of their unique drivers of return, can act as shock absorbers in a downturn. Private infrastructure, for example, often generates income tied to long-term contracts, providing stability when equity markets are swinging.

Potential for Enhanced Returns

While the stock market has historically delivered solid growth, alternatives open doors to opportunities not available in public markets. Access to private companies before they go public, or exposure to high-growth sectors in emerging economies, can help boost long-term returns.

Inflation and Income Protection

Alternatives like real estate or commodities often move in line with inflation, making them valuable hedges when the cost of living rises. Similarly, strategies like private credit or infrastructure can provide reliable income streams which is an important consideration, especially for retirees who need predictable cash flow.

Why They’re More Relevant Today

Traditional bonds, once seen as the reliable counterweight to equities, have struggled in low-interest environments. Meanwhile, equity valuations in certain markets can swing sharply with global events. Alternatives can help fill the gap, offering both resilience and return.

A Word of Caution

Alternatives are not a silver bullet. They often come with higher fees, lower liquidity, and more complexity than traditional investments. This is why their role must be tailored to your personal financial picture. For some investors, a modest allocation may provide just enough diversification. For others, alternatives can play a larger role, particularly if long-term stability and income are priorities. Portfolios should not be one size-fits all.

Conclusion

Think of your portfolio as a house. Stocks and bonds make up the walls and roof, they’re essential. But alternatives are the foundation reinforcements that protect against unexpected shocks and shifting ground. Without them, your portfolio may be standing, but not as sturdy as it could be.

By thoughtfully integrating alternatives into your asset allocation, you don’t just diversify, you future-proof. The goal isn’t to chase every opportunity but to build a portfolio resilient enough to meet your unique goals, no matter how markets evolve.

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This information has been prepared by Jai Gandhi who is a  Investment Advisor for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this post  comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an 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 herein may not apply to all types of investors.

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