Crash-proof your portfolio by investing in alternative assets with low correlations to the stock market. From gold to life settlements, commercial bridge loans and even artwork and collectibles, these non-correlated investments can deliver superior returns while helping mitigate your risks when the market goes down.
However, investing in these assets requires a longer-term investment horizon. It’s also important to stay informed of their performance and outlook, avoiding making knee-jerk reactions during times of volatility.
Diversification is a key feature of non-correlated investments. However, it is important to remember that diversification cannot eliminate risk. It can even create additional risk.
For example, if an investor diversifies within the airline industry by buying railroad stocks, they may still be exposed to detrimental changes to the industry. These two types of assets are correlated and will feel similar effects if the sector is impacted.
Alternative investments such as art and farmland have a low correlation to the stock market and offer opportunities for investors with different investment objectives. But the time horizons of these assets can also increase risk, as they may be vulnerable to weather, theft, or other environmental factors.
Additionally, research shows that combining multiple factors with lower correlations doesn’t always generate higher risk-adjusted returns. It’s important to look at correlations over a long period and consider the effect of different rebalancing periods on the underlying strategy.
Liquidity is the ease with which an asset can be converted into cash at a fair price. It’s a key factor when considering non-correlated investments because you need to know that you can sell them quickly and without taking a loss.
Companies, including Caliber Funds, track their liquidity in several ways, using ratios to compare current liabilities (payments due within the next year) against existing assets. They also look at the speed at which they can turn inventory into revenue, a key measure of liquidity called turnover rate.
Stocks and bonds are highly liquid because they can be sold easily in the market, and you can typically find a buyer in just a few working days. But tangible assets like real estate are less liquid because you need to find a willing seller and may have to accept a lower price than you’d like. This is why you need to diversify your portfolio with non-correlated investments with different levels of liquidity.
Although it is impossible to achieve true non-correlation, smart diversification can help protect your portfolio against the risk of losing value. Assets that aren’t correlated with each other tend to perform differently, and the gains of one can cushion losses in another.
Investing in uncorrelated assets or strategies can be beneficial to your investment portfolio, but it can also require significant due diligence. For example, investing in artwork or collectibles can be difficult due to physical storage requirements and the potential for fakes or forgeries.
Other investments that provide benefits of non-correlation include merger arbitrage, trend-following strategies and managed futures. However, these types of investments can still experience volatility and should be a part of your long-term strategy. Investing in alternative assets can be an effective way to diversify your portfolio and protect against market volatility. For example, life settlements offer a safe, low-risk opportunity to grow your portfolio by purchasing unwanted or unneeded life insurance policies, and commercial bridge loans can provide steady income to your portfolio.