What are alternative investments? Alternative investments include those asset classes that are different from the three broad asset classes of Equities (Stocks), Bonds and Cash you traditionally see in a mutual fund or most other managed portfolio’s. Stock and Bond investing is often referred to as traditional but as you can already see, alternative investments which include Real Estate, Commodities, Private Companies, Collectibles, etc. have been around for a very long time.
Once a choice for only wealthy investors, alternative investments have moved into the mainstream. You might be surprised to learn that some of Canada’s largest and best-known pension funds invest as much as 50% of their portfolio in alternatives.
Not all investments are created equal and while alternatives have the potential to be of benefit its important to discuss the risk with your representative to ensure an alternative investment is right for you. At WealthTerra we recommend a balanced approach among asset classes and markets, one that is suitable for each individual and that meets their goals, objectives and risk tolerances.
An asset class is a specific category of assets or investments that generally exhibit similar characteristics and behave in somewhat a similar manner in the marketplace.
Asset Allocation is the general term used to describe the process of selecting the appropriate proportion of different asset classes in an investor’s portfolio. What percentage of apples, oranges, pears, pomegranates, dragon fruit to include in my personalized fruit salad. The asset allocation is the outcome of assessing the client’s needs and objectives, timelines, risk tolerances, constraints, etc.
*According to an often cited 1986 study by Brinson, Hood, and Beebower, “strategic asset allocation accounted for 93.6% of the variation in returns on very large investment portfolios.” Other studies have supported this finding, concluding that “asset allocation, rather than security selection and market timing decisions, had the greatest impact on the variability of total portfolio returns.”
*Canadian Securities Institute Inc., Investment Management Techniques (2014), pg. 12-5
According to the Canadian Securities Institute (2014), the three main reasons why an investor would include alternative investments in a portfolio are:
Alternative investments can increase the number of investment opportunities available to an investor, can increase portfolio diversification and can help control risk. They can add superior risk/return potential to a portfolio. Many alternative investments also target absolute returns which aim to produce returns regardless of market conditions.
In our opinion, alternative investments have an integral role to play in an investor’s portfolio. With the increasingly positive correlation among stocks and bonds (traditional asset classes) and the research that supports the importance of asset allocation, alternative investments can’t be ignored.
*CSI Global Education Inc., Advanced Investment Strategies (2012), pg. 9-6
All investing comes with risk there's no way to avoid it. Alternatives, just like traditional investments, have risks. Our duty at WealthTerra is to ensure you are aware and have an understanding of those risks present in each investment. Our Private Wealth Advisors (Dealing Representatives) will ensure you understand how each Alternative Investment will effect your portfolio and the regulations which make them available.
The best defence is a good offence and the best way to protect your wealth is by educating yourself. A little time spent on due diligence will go a long way for years to come. We strongly recommend and encourage our clients to get involved. Ask questions like "What are the risks with this investment?", "Who are the managers?", "What is their experience?". Know before you sign on the dotted line!
The trend of adding alternative investments to Canadian's portfolios is increasing. More and more investors are looking at ways to increase their portfolio's diversification. To meet this growing demand, WealthTerra offers alternative investment solutions which can be custom tailored towards specific client demands, across major asset classes and regions.
WealthTerra Capital Management Inc. is a registered Exempt Market Dealer in the provinces of AB, BC, MB, NL, & SK. There are risks associated with investing please be sure to read and understand these risks prior to investing.