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Investment Commentary

Alternative Investments: Worth The Effort

By Jon Henshue | Johnson Financial Group • March 02, 2023

3 minute read time

Our family expanded at the end of last year, but this bundle of joy didn’t come with a tax deduction. Instead, the new family member is of the furry variety. She’s an energetic and adorable golden retriever puppy who joined our family after I gave in to the pleas of my wife and daughters, who named the dog Izzy (short for Princess Isabelle, of course).

Until now, my desire to keep things simple (following my daughters’ infant and toddler stages) outweighed my willingness to put in the effort to care for a puppy. Keeping things simple is an understandable—and often admirable—objective. But sometimes a bit more complexity can bring real benefits, as Izzy is already proving.

For investors, a desire to keep things simple may keep the focus on stocks and bonds. They’re familiar. They’ve been the cornerstone of investment portfolios for an eternity. Yet a wide variety of investments exist beyond stocks and bonds, and a growing number of investment vehicles now make such strategies accessible to ordinary investors. If you’ve been reluctant to add to your portfolio’s “family,” this might be a good time to step back and consider alternative investments as complements to the core portfolio.

The extra effort of alternative investments

Just as parents may wonder why they would put in the effort to train a puppy, why would a rational investor willingly decide to undertake the additional effort to change something they’re comfortable with?

In both cases, my answer is to aim for a better future for themselves and those they love. I expect life with my furry friend Izzy will mean more exercise, companionship, better health, and the biggest smiles I’ll ever see each time my daughters walk in the door.

Likewise, I expect that alternative investment strategies will increase portfolio diversification and raise the likelihood that investors attain their investment goals, enabling them to use their wealth to fulfill their family’s needs and dreams.

That said, adding alternative investments to a portfolio may entail some effort, such as learning about unfamiliar asset classes and unique terminology. It means thoughtful consideration of which strategies to use and which investment structure best suits the individual. Incorporating alternative investments also requires an understanding of the return drivers to analyze whether performance is in line with expectations.

Alternative strategies will not be a fit for every portfolio, just as individual circumstances may mean that a pet is out of the question for some families. But for those willing to put in the extra effort, both adopting a pet and investing in alternatives bring the possibility of added benefits.

The Benefits of Diversification

Although excluding alternative investments was not detrimental to returns during the extended bull market of recent years, 2022 served as a reminder that while diversification may not work every time, it does work over time. In contrast to the historic decline for a traditional 60/40 stock and bond portfolio, many alternative asset classes generated positive returns during the year. Asset classes such as direct lending, infrastructure, and farmland had positive returns and mitigated total portfolio losses.

Moderating losses is a significant accomplishment, but owning something that is performing well may also decrease the likelihood that investors become so concerned that they exit the investments that are doing poorly. In this way, diversifying strategies can serve not only as a source of return but as a way to address the behavioral tendency to sell during market stress. After all, time in the markets beats timing the market.

None of this is meant to suggest that there won't be challenges along the way. I fully expect that there will be potty accidents in the house and shoes that reach an early demise. Likewise, there will be periods when alternative strategies fall short of expectations and require reexamination. But in the end, I believe the outcomes will be well worth the effort.

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This information is for educational and illustrative purposes only and should not be used or construed as financial advice, an offer to sell, a solicitation, an offer to buy or a recommendation for any security. Opinions expressed herein are as of the date of this report and do not necessarily represent the views of Johnson Financial Group and/or its affiliates. Johnson Financial Group and/or its affiliates may issue reports or have opinions that are inconsistent with this report. Johnson Financial Group and/or its affiliates do not warrant the accuracy or completeness of information contained herein. Such information is subject to change without notice and is not intended to influence your investment decisions. Johnson Financial Group and/or its affiliates do not provide legal or tax advice to clients. You should review your particular circumstances with your independent legal and tax advisors. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your taxes are prepared. Past performance is no guarantee of future results. All performance data, while deemed obtained from reliable sources, are not guaranteed for accuracy. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment losses. Certain investments, like real estate, equity investments and fixed income securities, carry a certain degree of risk and may not be suitable for all investors. An investor could lose all or a substantial amount of his or her investment. Johnson Financial Group is the parent company of Johnson Bank and Johnson Wealth Inc. NOT FDIC INSURED * NO BANK GUARANTEE * MAY LOSE VALUE