How Leveraging Alternative Assets and Modern Portfolio Theory Can Help Investors Improve Returns

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The recent and volatile twists and turns in today’s stock market have undoubtedly left individuals confused as to which direction it could take next – and perhaps a little nervous about their long-term investments and their nuggets. of retirement. Depending on what you read or watch, you might hear a variety of tips on what to do with your investments in light of this continuing uproar. As a serial entrepreneur with over 20 years of experience in real estate and investing, the only investment strategy that I have used for a long time is diversification. This is why at Executed, we take advantage of Modern Portfolio Theory, or MPT, when building our clients’ investment portfolios.

From my perspective, true diversification is more than just a balance of conventional investments spanning cash, stocks and fixed income. There is a large universe of alternative investments that may suit your risk profile and deserve a closer look. Let’s discuss.

Modern portfolio theory was created by Nobel Laureate Harry Markowitz and first published in his article “Portfolio Selection” in the Journal of Finance of 1952. Markowitz summed it up this way, “A good portfolio is more than a long list of good stocks and bonds. It is a balanced whole, providing the investor with protections and opportunities against a wide range of contingencies.

MPT is an investment strategy that helps investors manage the risk of the investment portfolio while seeking increased returns through diversification. MPT postulates that markets are more efficient and reliable than investors. According to Markowitz’s theory, based on increasing the level of risk you are willing to take, you can potentially get better returns.

MPT assumes that investors want the highest returns with the least amount of risk. But risk and reward when it comes to investing have a positive correlation; When you invest in low risk assets like bonds, your returns will generally be lower than those of investing in high risk assets like stocks. Investors must strike a balance between risk and reward. MPT says that this balance can be achieved through diversification.

At Realized, we believe that a balanced portfolio that contains a variety of asset types, including alternative investments like real estate, can help investors improve returns while managing risk. Let’s explore some alternative investments to consider in a portfolio and the potential return an investor can expect by including them in their diversified strategy.

Define alternative investments

Conventional investments are things like stocks, bonds, cash, and alternatives to cash, such as money market accounts and CDs. Alternative investments are things that don’t fit into any of these categories. Alternative investments can include:

  • Real Estate (Delaware Statutory Trusts, QOZ, raw land, co-working spaces, commercial spaces, etc.)
  • Hedge funds
  • Capital investment
  • Crypto-currencies
  • NFT (Non-fungible tokens)
  • Collectibles
  • Merchandise

In the past, alternative investments were of interest only to high net worth and institutional investors. But in recent years, they have become more common and have also started to gain the attention of ordinary investors.

Keep in mind that alternative investments are riskier than conventional investments; they do not have a long experience and, in some cases, are less regulated and transparent. And alternative investments are often less liquid than traditional assets. But alternative investments can offer higher returns, and because they are generally not correlated with the stock market, they can help protect your portfolio from market fluctuations.

Alternative investments and modern portfolio theory

In 1952, diversification basically meant a mix of just two asset classes: stocks and bonds, usually in a 60/40 split of stocks and bonds, respectively. At the moment, we believe that a diversified portfolio should include more alternative investments, including real estate.

The current MPT dictates that a diversified portfolio can contain between 10% and 20% alternative investments, including real estate. Most individual investors are far from this, spending only 5% to alternative investments, while pension funds and endowments are well above, with 30% and 50% respectively invested in alternatives. These large investors are looking to alternatives – and real estate in particular – to further diversify their portfolios and because of the income and yield opportunities that real estate offers.

Why use real estate as an alternative asset

Based on data from Griffin Capital, alternative assets can help improve portfolio returns while managing the overall risk and volatility of an investment portfolio. Over the past 20 years, a 60/40 portfolio of stocks and bonds has shown returns about 6.86%. However, changing this allocation to 55/35/10 stocks / bonds / real estate yields increased to 7.06%. Additionally, adding real estate to portfolios reduced volatility from 9.90% in the 60/40 split to 9.15% in portfolios with 55/35/10.

While inflation hasn’t been a problem since the Great Recession, it can be detrimental to fixed income investors. Inflation could mean higher bond yields, lowering the valuation of an existing bond portfolio and eating away at real yields. We believe this justifies a growing need for greater portfolio diversity, including alternative investments.

Alternative assets and your portfolio

At Realized, we believe that building a portfolio that contains diversified, tax-deferred commercial real estate investments can help investors achieve their financial goals. Using the principles of what we call Investment Property Wealth Management®, or IPWM ™, investors can take advantage of tactics like 1031 exchanges when selling their investment properties, allowing them to keep more of their investment property. of their money to achieve their financial goals. Using a 1031 exchange allows investors to exchange their investment property for a replacement property of the same nature and to defer capital gains tax on the sale. Our team assists investors through the 1031 exchange and develops custom portfolios that contain fractional investments in commercial grade properties, allowing investors to access properties that may have been beyond their reach on their own.

These alternative assets, such as Delaware Statutory Trusts (DSTs), can not only provide an alternative source of income and help diversify your portfolio, but they can also create a tax-deferred way to keep more of your profits. long-term. . Additionally, by creating a diversified portfolio made up of different types of properties across the country, investors are better able to manage risk.

When building your investment portfolio, we recommend that you include real estate alongside stocks and bonds to potentially achieve a higher level of return.

Full disclosure. The information provided here is not investment, tax or financial advice. You should consult a licensed professional for advice regarding your specific situation.

David Wieland is Founder and CEO of Realized Holdings, a technology platform providing real estate wealth solutions to individuals and families who own inherited properties and other valued financial and capital assets. Investors use the Realized platform to transfer wealth from properties and legacy assets to passive commercial real estate portfolios, comprised of DST and QOZ investments and tailored to their specific needs. To find out more, visit www.realized1031.com.

Founder and CEO, Realized

David Wieland, is CEO and co-founder of Executed, a company that helps people manage their investment real estate wealth. He has engineered over $ 3 billion in institutional and capital market real estate transactions. David drives Realized’s vision to help investors maximize their after-tax returns and create personalized investment portfolios tailored to each investor’s risk tolerance, long-term goals and income needs.


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