Is now the time to invest in alternatives?
A common mistake retiree investors make in regard to alternatives is to invest ‘after the fact’, adding them to portfolios when equities struggle and alternatives perform well, as was the case in the five year period following the GFC (2008).
In Invesco’s paper, Walter Davis, Invesco’s Alternatives Investment Strategist, argues that the benefits of diversification could have been better realised if retirees had held alternatives before the 56% decline in the S&P 500 index that occurred during the GFC.
Mr. Davis makes number of additional points in his paper:
- During the current unusual period in financial markets, the unique benefits of alternatives (e.g. unique timing of returns, risk reduction and diversification) have been ‘lost in the froth’.
- The combination of high stock returns and low risk won’t last forever and will ultimately revert to long-term historical averages.
- Today’s market environment is reminiscent of the 1990s tech boom as risk is undervalued and the value of skilled, active management is underestimated.
- Looking back over 20 years, a portfolio holding a diversified set of alternatives would have generated higher returns with lower volatility and lower maximum decline than a standard 60% stock/40% bond portfolio.
Read Walter Davis’ article to understand why investors should consider increasing their allocation to alternatives as global monetary policies tighten, market conditions turn more challenging, and volatility is on the rise.