When it comes to investing, the folks at Yale know what they’re doing. Over the past 10 years, the Yale Endowment has achieved a 10% average annualized rate of return. Looking back on the past two decades, the Endowment has generated an average annualized rate of return of 13.7%.
How have they accomplished this? One main reason is their allocation towards alternative investments. According to the Yale Endowment Report 2014, “Over the past two decades, Yale dramatically reduced the Endowment’s dependence on domestic marketable securities [stocks/bonds] by reallocating assets to nontraditional asset classes...The heavy allocation to nontraditional asset classes stems from their return potential and diversifying power.”1
What are Alternative Investments?
We can define them as any investment that is not a stock in a publicly traded company, a publicly traded bond, or cash. One alternative that many people already own is real estate. Other alternatives include commodities, hedge funds, private equity, art, coins, etc.
Why should I consider Alternative Investments?
Diversifying with alternatives can help you in a variety of ways. Depending on the type you own, they have the potential to increase your rate of return during volatile markets,2 generate more income than bonds*, and reduce the volatility in your portfolio.3 The inclusion of alternative investments can provide exposure to a wider range of asset classes. As we have seen traditional asset classes become increasingly correlated, alternatives are more likely to zig when traditional investments zag. Just like any investment, alternatives carry risks too. Examples of typical risks are that they typically have higher costs, are more complex, and may not be liquid as say a stock or bond.
How Do I Get Access to Them?
Historically, only institutional and ultra high net worth investors had access to the bulk of alternatives. The good news is, over the past few years, access to alternatives has been greatly increased for individual investors. Alternatives come in two main forms: liquid and illiquid. Liquid alternatives are easily accessible through mutual funds and Exchange Traded Funds (ETFs). Illiquid alternatives are typically available through financial advisors in the form of Non-traded REITs, BDCs, and private closed-end funds.
In closing, Yale teaches us that as investors, we need to think outside of the box with our investment asset allocation. When used appropriately, alternatives can help us diversify more than we could with just a mix of stocks and bonds, which may potentially result in lower portfolio volatility and greater returns. Make sure you do your research and/or work with a qualified financial professional who can help you evaluate different alternatives, determine whether or not they may appropriate for you, and demonstrate how to incorporate them into your existing investment strategy.
Rebecca Tinger and Justin Caudle, financial advisors with McAdam, provide comprehensive financial planning to business executives, attorneys, and successful families in the DC metropolitan area. They strive to simplify clients’ financial lives, provide access to planning and investment strategies, and help clients achieve financial confidence.