Many investors are starting to look into alternatives as part of a well-rounded portfolio, and it's important to understand why.

Diversification

A diverse portfolio is one that includes a broad mix of assets to help the investor reduce risk and weather market volatility while steadily increasing in value over time. The old rule of thumb was "60/40," denoting a portfolio comprising 60 percent stocks and 40 percent bonds, the wisdom being that a portfolio divided in this way would be able to provide relatively stable growth over time. According to iCapital Network, that 60/40 portfolio would only generate half of what is has historically due to significantly more volatility, highlighting the need for a more nuanced view of diversity than what existed in the past.

Alternative investments usually have little to no correlation with traditional asset classes, making them a great option for a diverse portfolio by reducing an investor's risk exposure by spreading it across multiple investments. Since the value of your alternative assets is untethered from what happened on Wall Street on any given day, they can help even out price fluctuations of traditional markets.

Volatility Hedge

The last two years have been a roller coaster ride for publicly traded markets. The pandemic's arrival in March 2020 effectively killed the historic 11-year bull run for the U.S. stock market, with the VIX volatility index hitting a record high. The economy rebounded swiftly before falling off again in 2022, and high levels of volatility have remained.

Privately traded investments are generally not directly tied to a company's performance, a botched product or service release, or general market irrationality. This makes alternative assets a solid potential hedge against the ups and downs of traditional markets

Some alternatives, like cryptocurrencies and fine art, can be more volatile than others, but fine wine is often held up as an example of a more stable alternative investment, with price movement compared to the bond market. Over the last 15 years, fine wine has outpaced the Dow Jones and S&P 500, with a 13.6 percent annual return.

Greater Returns

It's no secret that alternatives have the potential to reward investors with larger-than-average returns, and it's one of the reasons they're so popular. One ringing endorsement for alternative investments is how heavily invested wealthy individuals and families are in the asset class. According to a recent Motley Fool analysis, ultra-high-net-worth individuals (those with a net worth over $30 million) have approximately 50 percent of their assets in alternatives. For the average investor, that number is just 5 percent.

However, increased access to privately traded investments for retail investors coupled with the volatility of traditional markets are helping push the proportion of global assets invested in alternatives to new heights. According to Preqin, the total assets under management (AUM) in alternatives is on pace to increase by 60 percent to $17.2 trillion by 2025.

Conclusion

Alternative assets and the outsized returns they've seen in recent years, have historically only been available to the wealthy. With Vincent, investors at all levels can include all manner of alternatives in their portfolios, choosing from art, collectibles, crypto, private credit, real estate and venture. It's a whole new era where nearly everything is on the table for investors.