We've all heard the wisdom of not putting all your eggs in one basket. In traditional investment theory, this means holding a range of different assets in your retirement portfolio.
If you hold fewer types of securities, there is a greater risk that a decline in one of them could adversely affect your whole portfolio. By diversifying your holdings into assets that may perform independently of each other across different markets, you spread out the risk, or volatility, of the overall portfolio.
These different cycles of performance are aimed at preventing positive correlation, or the risk that your assets move in tandem and perform similarly. Traditionally, asset classes such as stocks and bonds would be negatively correlated, meaning they generally have moved in opposite directions and provided returns accordingly.
But following the 2008 financial crisis and the subsequent low-interest-rate environment, asset classes that used to provide diversification have been exposed to many of the same factors.
But you can still diversify by considering what's called alternative investing, a wider range of strategies that until recently were mainly available to institutions and very wealthy investors only.
Alternative investing is based on the premise that it's possible to buy a basket of investments with different risks that may perform independently of one other. These could include assets such as commodities, or strategies that take advantage of differing economic outlooks in various parts of the world.
This kind of diversification seeks to provide alternative s of capital growth and income with low correlations to public markets. Gaining access to such liquid alternatives is now possible for the average investor through mutual funds and exchange traded funds.
These give more investors the opportunity to move away from the traditional stock/bond make-up of the typical retirement portfolio.
Consult your financial advisor about alternative investing and find out more here.
