A traditional "60/40" allocation to stocks and bonds may no longer be enough to provide you with the returns and diversification needed to achieve your long-term goals. Over the past 10 years most portfolios carried predominantly equity risk: a 60/40 portfolio moved in the same direction as the S&P 500 Index 99% of the time1.
A look at various possible portfolio allocations using the classic "efficient frontier" curve, which shows the optimal portfolios for generating the highest returns for defined levels of risk, demonstrates the potential of alternatives. When selected for their low correlation to other parts of a portfolio, alternative investments may help lower volatility, enhance returns and broaden diversification.
Modern Portfolio Theory did not fail during the credit crisis — portfolio construction did. So where should you go from here?
Alternative investments can help you mitigate the effects of market volatility on your portfolio while providing attractive returns.
A "diversified" portfolio of stocks and bonds has been moving nearly in lock step with the stock market. Alternatives can potentially lower this correlation and dampen the effects of market volatility.
Diversifying risk is essential, but it is not enough to only balance exposure to asset classes.