Alternative Investing: Time-Tested for Volatile Markets | Schwab - Millennium Trust Company

Alternative Investing: Time-Tested for Volatile Markets

February 10, 2023
By Millennium Trust

The only certainty when investing is that markets won’t rise to the sky, nor are they likely to disappear. They will, however, make you forget all that during periods of volatility.

This is true even when investors use widely accepted allocation strategies like a 60% stock/40% bond portfolio or a ‘three-legged stool’ approach (equal parts of cash, bonds and stocks). Both are easy to follow, and many advisors suggest them and the mutual funds that use such allocations. But these strategies only address the question of “how” to allocate sensibly.

What these strategies don’t account for are the factors that help investors reach their goals — their investing time horizon, tolerance for risk, and future income needs. Also, when interest rates and inflation rise and profit margins fall, stocks, bonds and purchasing power can all decline at the same time. When this occurs, these strategies tend to be insufficient at offsetting the damage.

That is when holding alternatives can help.

It’s estimated that retail investors currently allocate between 2% and 10% of their capital to alternative assets.

What are the alternatives?

Alternative investments typically perform differently than the traditional stocks and bonds. Alternatives generally have low correlations with other asset classes and can continue to prosper regardless of what is happening in the markets. As a result, having alternative investments in a portfolio can potentially add layers of diversification that may help offset losses when the prices of traditional assets decline.

Types of Alternative Investments

  • Real estate (Including LLCs and REITs)
  • Hedge funds
  • Digital currency funds
  • Commodities
  • Managed futures
  • Marketplace loans
  • Private equity or debt
  • Crowdfunding
  • Gold and other precious metals
  • Multi-strategy

Consider allocating like an Ivy League endowment fund

For decades, endowment funds, institutional investors, family offices, and ultra-high net worth individuals have allocated a portion of their portfolio to alternative investments. Alternatives can be powerful diversifiers, offering some protection against market volatility when held in a broadly diversified portfolio.

The factors that influence stocks and bonds affect alternatives in different ways, leaving them less correlated to traditional assets. This is why adding alternatives to a traditional portfolio can lead to less volatility. Alternatives may continue to perform well regardless of what is happening in the markets. The effect can be even more pronounced when owned within a tax-advantaged account like a self-directed IRA.

Research on the performance of endowment funds offers some proof that adding alternative investments leads to a more resilient portfolio. For instance, while the asset allocation of top U.S. endowment funds may include significant equity allocations, those holdings typically include U.S. equites, non-U.S. equities, emerging markets and private equity.

Also, their portfolios often include real estate, natural resources, and other real assets. An often-cited report on the performance of endowment funds found those with the greatest exposure to alternatives had the highest returns over a 20-year period.

The strategic use of alternative assets in a diversified target-date fund can improve a retiree's income stream by an estimated 11-17%.

Accessing the alts market

Until recently, certain barriers to entry kept alternative investing restricted to large institutional and accredited investors. For instance, some alternatives, such as undeveloped plots of land or hedge funds tend to require large dollar commitments. They are often less liquid and have high transaction costs, putting them beyond the reach of the typical IRA investor.

New fintech platforms and investment structures reduced these barriers. The Millennium Alternative Investment Network® (MAIN®) serves as a resource for clients and advisors looking to access alternative investments, conduct research and find investments with lower initial minimums.

Specializing in the custody of alternatives

As a directed custodian, we have a long history of providing custody services for institutional, accredited and nonaccredited investors who invest in all types of alternative investments. We offer access to a variety of platforms, will track and report account activity, process annual tax documents and provide accurate and timely record keeping.

If you plan to use alternative investments to further diversify your self-directed IRA, you can learn more about the advantages on our website.

The material in this Blog is presented for informational purposes only. The information presented is not investment, legal, tax or compliance advice. Millennium Trust Company performs the duties of a directed custodian, and as such does not offer or sell investments or provide investment, legal, or tax advice.

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