Alternative investments are an excellent way to diversify your investment portfolio during uncertain economic times. But how big is the alternative investment industry, and is it actually growing? While it can be difficult to come up with an exact number, there are many statistics that may help you get a better understanding of the broader landscape. Here are five statistics from Stacker.com that show positive signs for alternative investments:
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- In 2022, approximately 5% more money was invested in alternative investments than the previous year.
- Individuals with over $1 billion in assets keep more than half their investable wealth in alternative investments.
- At the end of 2021, alternative investments had over $13 trillion in assets.
- Investments in private equity are the majority of the alternative investment industry.
- Over the last decade, an alternative investment portfolio would have seen an almost 9% return per year.
These statistics clue us into an important fact: alternative investments are a viable investment strategy that savvy investors are increasingly taking advantage of. Let’s learn more about this industry and explore some frequently asked questions.
Are Alternative Investments Becoming More Popular?
Yes, alternative investments have been gaining in popularity over the past decade. In fact, a Cerulli Associates poll found that asset managers kept about 15% of their investments in alternatives in the first half of 2022. This is an increase of 10% year-over-year. Additionally, all the advisors that were polled said they intend to increase that allocation to nearly 20% of invested capital in the future.
Another interesting trend was found by the 2022 Bank of America Private Bank Study. This research showed that 80% of younger investors (between the ages of 21 and 42) are putting money into alternative investments. Compared to older investors, they allocate three times as much of their portfolios to alternative investments (16%) and half as much to stocks (25%). Older investors sit at 5% and 55%, respectively.
Why Are Alternative Investments Becoming So Popular?
The growth of alternative investments is driven by a huge number of factors, like a global pandemic or economic instability or rapid technological developments. Although it’s impossible to pin it to one factor, it seems clear that a major reason why alternative investments are growing is market volatility. In uncertain times, traditional investments like stocks and bonds often have lower returns, and if all your eggs are in one basket (like a traditional asset class), then your portfolio has a high risk of taking a tumble.
Alternative investments offer the opportunity to diversify your portfolio, potentially mitigate risks, and increase the potential for higher returns. However, it’s important to note that alternative investments, like all investments, can come with their own set of risks—and they may have lower liquidity compared to traditional investments. It’s vital to perform due diligence and research, and understand your specific risks when considering this type of investment. Your financial advisor can help you make an informed investment.
How Much of My Portfolio Should Be in Alternatives?
The percentage of your portfolio that is dedicated to alternative investments varies depending on your individual goals and risk tolerance. J.P. Morgan reports that the typical range seen among private bank clients is 15% to 30% of their overall portfolio, while some high-income clients and large endowments do allocate 50% or more to alternatives. There is no one-size-fits-all answer, and you’ll want to carefully consider factors like:
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- Your individual risk tolerance
- Personal investment goals
- Expertise and understanding
- Current (and future) market conditions
- Liquidity needs
You should approach alternative investments with careful consideration and research, making sure to never allocate more to these assets than you’re comfortable with or can afford to lose. As always, it’s important to consult your financial advisor for advice whenever you are considering any investment moves to assess whether such investments are suitable for you based on your investment goals, risk tolerance, and financial situation.
What Alternative Investment Ideas Can I Explore for My Portfolio?
One alternative investment idea that may be appealing to investors is life settlements. This alternative investment provides a way for individuals with an unwanted or unneeded life insurance policy to sell this policy to an investor. As the investor, you then become the beneficiary, taking over paying the premiums, and receiving the death benefit. You might choose this alternative investment for several reasons:
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- Potential Returns: Life settlements may offer attractive returns compared to traditional investment options, especially in a low-interest rate environment.
- Diversification: Adding an additional asset class may help balance your portfolio during market volatility.
- Non-Market Dependence: Since life settlements’ returns are based on life expectancies, not market fluctuations, this may make them less susceptible to economic turbulence.
- Demographics: As the population ages, there’s a growing pool of life insurance policies potentially available for life settlement investments.
While this is all attractive, it’s important to remember that life settlements are not without risk. They can come with uncertain timing concerns, as the return on investment involves the insured individuals’ lifespans. Additionally, they can be illiquid investments, as exiting early can be challenging. Before choosing this type of alternative investment, it’s vital to consult with professionals with expertise in this field.
You’ll find compassionate and knowledgeable professionals at i2 Advisors. We’re here to help guide you through this alternative investment opportunity and determine if this is right for you. Our decades of experience are yours to take advantage of as you seek to add diversification to your portfolio. Contact us today to start the conversation. We look forward to hearing from you!
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