Investing has become increasingly challenging as companies remain private longer, leaving retail investors with fewer high-growth opportunities by the time they hit the public markets. This shift poses a significant dilemma, especially when growth is crucial for securing adequate retirement funds. So, where can everyday investors find the growth they need? The answer might lie beyond traditional stocks, bonds, CDs, and savings accounts.

Exploring alternative investments could be the key to unlocking higher returns and diversifying your portfolio. Options like private credit, fine art, and digital assets such as cryptocurrencies offer unique opportunities that traditional investments often lack. Big investors, including pension funds, are shifting their strategies away from the classic 60/40 portfolio. How can you adapt your investment approach to keep up? Let's explore practical tips for navigating this complex landscape.

Why You Need to Be Focusing on Growing Returns (and Why Finding Them is So Hard!)

The Shift to Alternative Investments

Overview of Alternative Investments

Alternative investments encompass a broad range of asset classes that diverge from traditional stocks, bonds, and mutual funds. These include private equity, private credit, fine art, fine wine, and passion assets such as collectibles and memorabilia. Unlike conventional investments, alternatives often offer unique opportunities for diversification and higher returns, albeit with different risk profiles and liquidity considerations.

Private equity involves investing in companies that aren't publicly traded. These investments can range from venture capital in startups to buyouts of established firms. Private credit, on the other hand, refers to non-bank lending to private companies, offering higher yields but with varying degrees of risk. Fine art and wine are tangible assets that can appreciate over time, driven by market demand and rarity. Passion assets, such as vintage cars or sports memorabilia, combine personal interest with investment potential, though they often lack the liquidity and transparency of more traditional assets.

Why Alternatives Matter

The primary appeal of alternative investments lies in their potential for higher returns and their ability to diversify a portfolio. Unlike traditional assets, which are often correlated with market movements, alternatives can provide a hedge against market volatility. This reduced correlation means that when stocks and bonds underperform, alternative investments might still generate positive returns, thereby stabilizing the overall portfolio performance.

Alternatives often tap into niche markets with less competition and more inefficiencies, allowing savvy investors to exploit these opportunities for significant gains. For instance, private equity investments can yield substantial returns as companies grow and eventually go public or get acquired. Similarly, private credit can offer attractive yields, especially in a low-interest-rate environment where traditional fixed-income securities provide minimal returns.

Private Credit: A Growing Opportunity

Understanding Private Credit

Private credit refers to debt financing provided by non-bank entities to private companies. This asset class has gained traction, especially after the 2008 financial crisis, as banks tightened their lending criteria. Private credit includes direct lending, mezzanine financing, and distressed debt, among others. These loans are typically extended to middle-market companies that may not have access to traditional bank financing.

Access for Retail Investors

Fintech innovation and Reg A+, a regulatory exemption, have come together to bring a new universe of higher yielding fixed-income products for retail investors. It is the fintech technology that makes it economically feasible for retail investors to obtain these fixed-income alternatives with investment minimums as low as $10. It is the Reg A+ exemption that has made these new SEC-qualified private debt products legally accessible to the mass market.

“This dynamic is ensuring that more and more of these private opportunities are able to be accessed by smaller investors. That is what the crowdfunding and blockchain movements are all about, and that's where we're headed,” says Dara Albright, fintech speaker and advisor.

Risk and Reward

Investing in private credit comes with its own set of risks and rewards. On the reward side, private credit can offer higher yields compared to traditional fixed-income securities, making it an attractive option for income-seeking investors. The loans are often secured with collateral, providing a layer of protection against defaults.

However, the risks include credit risk, where the borrower may default on the loan, and liquidity risk, as these investments are not easily tradable. Additionally, private credit investments require thorough due diligence to assess the borrower's creditworthiness and the quality of the collateral. Despite these risks, the potential for high returns and diversification makes private credit a compelling addition to an investment portfolio.

Digital Opportunities: Crypto and Tokenization

The Rise of Digital Assets

Digital assets, including cryptocurrencies and tokenized assets, have surged in popularity over the past decade. Cryptocurrencies like Bitcoin and Ethereum have captured the imagination of investors with their decentralized nature and potential for high returns. Tokenization, on the other hand, involves converting physical or digital assets into digital tokens that can be traded on blockchain platforms.

Why They Are Popular

The appeal of digital assets lies in their decentralization, high growth potential, and accessibility. Cryptocurrencies operate on decentralized networks, reducing the need for intermediaries and offering greater transparency and security. The high volatility of these assets also presents opportunities for significant gains, attracting speculative investors.

Tokenization democratizes access to assets that were previously illiquid or reserved for institutional investors. For instance, real estate properties, fine art, and even private equity shares can be tokenized, allowing fractional ownership and easier trading. This opens up new investment avenues for retail investors who can now participate in high-value assets with smaller capital outlays.

Navigating the Risks

Investing in digital assets is not without risks. Cryptocurrencies are highly volatile, with prices subject to dramatic fluctuations. Regulatory uncertainties also pose a significant risk, as governments around the world grapple with how to regulate these new asset classes. Security risks, including hacking and fraud, are also prevalent in the digital asset space.

To mitigate these risks, investors should conduct thorough research and due diligence. Diversifying across multiple digital assets and using secure, reputable platforms for trading and storage can help manage these risks. Additionally, staying informed about regulatory developments and market trends is crucial for navigating the volatile digital asset landscape.

The Evolution of the 60/40 Portfolio

The Traditional 60/40 Portfolio

Throughout the history of modern finance, advisors have been constantly trying to figure out the most optimum way to diversify an investment portfolio. How much of one’s portfolio should be in riskier growth assets like stocks versus less risky assets such as bonds? It used to be that advisors would recommend asset allocation based on age. For example, a 70-year-old should have 70% of one’s portfolio allocated to fixed-income and 30% to equities whereas a 30-year-old should have 30% in fixed-income and 70% in stocks. However, particularly as interest rates declined, advisors moved towards the 60/40 portfolio, consisting of 60% equities and 40% bonds. Whereas, historically, this 60/40 mix has performed well, as new asset classes emerged and with earlier stage growth companies remaining private much longer, and with traditional bond yields declining, the 60/40 model began underperforming. So, in order to provide investors with better risk-adjusted returns, advisors began moving assets from traditional stocks and bonds into higher yielding private equity and private credit. 

Why It’s No Longer Enough

However, the traditional 60/40 portfolio is increasingly seen as inadequate in today's market environment. Factors such as high equity valuations, low bond yields, and increased market volatility have eroded the effectiveness of this strategy. Bob Rice, Chief Investment Strategist at Tangent Capital, notes, “The old 60/40 portfolio did the things that clients wanted, but those two asset classes alone cannot provide that anymore.”

The low-interest-rate environment has particularly impacted bond returns, making it challenging for the 40% bond allocation to provide the desired income and stability. Additionally, the correlation between stocks and bonds has increased during market downturns, reducing the diversification benefits of the 60/40 mix.

Adapting Your Strategy

To adapt to the changing market dynamics, investors should consider diversifying beyond the traditional 60/40 portfolio. Incorporating alternative investments such as private equity, private credit, and real assets can enhance portfolio diversification and return potential. Inflation-protected assets, such as Treasury Inflation-Protected Securities (TIPS) and commodities, can also provide a hedge against inflation and market volatility.

Alex Shahidi, Managing Director at Evoke Advisors, suggests a more diversified approach: “An alternative portfolio composed of roughly 30% Treasury bonds, 30% TIPS, 20% equities, and 20% commodities can deliver competitive returns with substantially lower volatility.”

Practical Tips for Everyday Investors

Getting Started with Alternatives

For retail investors looking to explore alternative investments, the first step is to educate themselves about the various options available. Understanding the characteristics, risks, and potential returns of different alternative assets is crucial. Platforms like Worthy provide resources and tools to help investors learn about alternative investments.

Due Diligence and Research

Thorough research and due diligence are essential before investing in alternatives. Investors should evaluate the track record and reputation of the investment platform or fund manager. Assessing the underlying assets, understanding the investment strategy, and reviewing historical performance data can help investors make informed decisions.

Balancing Risk and Reward

Balancing the potential risks and rewards of alternative investments is key to building a resilient portfolio. Investors should consider their risk tolerance, investment horizon, and liquidity needs when allocating to alternatives. Diversifying across multiple alternative assets can help mitigate risks and enhance return potential.

• Understand the characteristics, risks, and potential returns of different alternative assets.

• Evaluate the track record and reputation of the investment platform or fund manager.

The investment landscape is evolving, and traditional strategies may no longer suffice. By exploring alternative investments and adapting their portfolios, everyday investors can uncover new growth opportunities and achieve better diversification.

Conclusion: Embracing the New Investment Landscape

Navigating the modern investment landscape requires a shift away from traditional strategies like the 60/40 portfolio. As companies stay private longer and market volatility increases, retail investors must look to alternative investments for growth and diversification. Private credit, fine art, and digital assets offer unique opportunities that traditional stocks and bonds can't match. These alternatives not only provide higher returns but also reduce portfolio correlation, offering a hedge against market downturns.

The evolving financial environment demands that investors adapt and explore new avenues. By understanding the risks and rewards of alternative investments, conducting thorough due diligence, and diversifying wisely, everyday investors can uncover growth opportunities that were once out of reach. As the investment world continues to change, those who embrace these alternatives will be better positioned to secure their financial futures. Remember, the old ways aren't enough anymore—it's time to think differently and act boldly.