What Are The “Alternative” Solutions for Diversification?

During the subprime crisis (2007-2009), equities and real estate fell simultaneously in the United States. During the public debt crisis in Europe (2010-2012), the sovereign bond market suffered simultaneously with investments. The three asset classes may fall simultaneously in the event of a sharp rise in interest rates, which could lead to a fall in bonds, a fall in mortgage lending, and a fall in equities.

However, the diversification of its investments aims precisely to avoid this type of correlation in the event of a financial crisis. In particular, it is in response to this problem that new investment solutions have developed in recent years that can react differently to equities, bonds, and real estate.

Alternative solutions

“Alternative” investing refers to investments in unlisted markets whose returns will depend less on economic conditions. Gold is the most traditional alternative investment. Because of its reputation as a safe-haven, it tends to rise as other asset classes fall. It is also a fortification against inflation.

However, it offers no return (no dividends or coupons) and remains subject to the laws of supply and demand that can sometimes result in sudden price changes. It is also tricky in certain parts of the world to invest in gold through readily negotiable financial products. Investment in “real assets,” such as a forest or vineyard, provides regular returns for producing tangible goods.

Investment in these asset classes can be made through financial products managed by specialized companies but is often only accessible to institutional or wealthy clients. If you are interested in this type of investment, speak to Kirk Chewning.

Diversification within each asset class

To ensure a reduction in risk, it is generally recommended that investors diversify within each asset class in which they operate. The best-known example is that of equities, where it is recommended to invest in several companies at the same time, generally choosing companies present in different sectors of activity. This same precept also applies to other asset classes, especially crowd-funding and crowd-lending.

To minimize the risk of bankruptcy, it is recommended to invest small sums on several projects at the same time to benefit from a good diversification. Combining investments in real estate crowd-funding with other investments in corporate crowd-funding can, for example, be an excellent way to diversify investments in a non-listed sector.