In today’s investment world, alternative investments have emerged from the shadows into the light of the mainstream. New technology and platforms have made alternative investments more accessible than at any time in history, bringing new opportunities for investors to rethink the traditional 70/30 (or 60/40, or thereabouts, depending on your risk profile) rule when it comes to the asset allocation of their portfolios.
So, What Are Alternatives?
The term alternative investments broadly refer to any investment that is not publicly traded, meaning they sit outside of the traditional liquid markets of stocks, bonds, and cash.
The range of Alternatives is extensive and includes private equity, private debt, hedge funds, real estate, precious metals, commodities, collectibles, cryptocurrencies, and more. They provide an opportunity to gain exposure to different market sectors and potentially achieve higher returns than traditional investments. But it is important to note that they generally come with greater risk and increased complexity, so doing your due diligence and educating yourself is vital to increase your knowledge and ensure you understand what you’re getting into.
The Old Way of Allocating Assets in an Investment Portfolio
The old-school approach for many investors and financial advisors has traditionally been to structure an investment portfolio on a 70/30 basis (or similar figures). This strategy allocates 70% of an investor’s funds to equities or equity-focused investments, and 30% to bonds, or fixed-income investments.
The general theory of this approach is that the higher return (but higher risk) equities bucket provides a growth opportunity for the portfolio, while the lower risk (but lower return) fixed income bucket provides safety for the portfolio to reduce risk and preserve investor capital.
The New Opportunity for Asset Allocation
The opportunities available today for investors and advisors to diversify their portfolios out of straight stocks and bonds have never been greater.
A radical new approach is now accessible and available to investors to reinvent the old-fashioned portfolio structure. This modern strategy is a 60/30/10 percentage – or similar – allocation.
This reinventive basic rule to portfolio structure means allocating 60% to equities, 30% to bonds, and 10% to alternatives. The exact percentages may vary by portfolio, but the key idea is that Alternatives should be an integral part of every portfolio, in some percentage. The reason for doing this is to access the high-growth opportunity of quality alternatives.
Invest in the Long-Term, the Modern Way
It is time for investors and financial advisors to sit up and take notice – the investment world has changed. Historically, alternatives have been considered as assets not available to the general public, instead being reserved for ultra-high-net-worth individuals. Viewed as something only for individuals and institutions with deep pockets and a penchant for risk, the concept of investing in alternatives has long been seen as something that did not belong in portfolio construction or asset allocation for the average accredited investor.
One of the reasons for this limiting perspective is that in the past, investing in alternatives has often been a private and restricted opportunity, something discussed at posh dinners at elite country clubs. Another reason is that minimum check sizes for some alternative investments such as angel investing or venture capital have been beyond the reach of many investors. So, many of these opportunities were perceived to be the domain of ultra-high-net-worth investors with a high-risk appetite who moved in the right circles and networked with the right people.
That’s how it used to be. But now the rules have changed.
New Technology Brings New Opportunity
The recent surge in consumer-directed investment platforms has truly changed the game when it comes to how the average investor is able to structure their own investments. Beyond that, crowdfunding investment platforms have also made great strides in lowering the barriers that have traditionally existed between the public and those more complicated and opaque investments called alternatives.
Financial technology (fintech) brings innovation and technology to the world of finance. Fintech is developing at a rapid and accelerating pace that is turning traditional financial services on its head. This emerging industry leverages technology to improve access and create opportunities in the financial sector for most people.
New fintech platforms have dramatically increased access to all kinds of alternatives. Propel(x) is a great example of this because we have reinvented how average investors can become Angel investors in startups and have made it possible to do this with as little as $5,000. We recently onboarded our first hedge-fund – making that historically restricted opportunity available to accredited investors as well.
As with any investment, there is a risk involved in startup funding and there is no guarantee these companies will take off in the long-term. In fact, there is a risk of complete capital loss.
Also, while work is being done to build a secondary market to improve liquidity in private equity investments, alternatives typically require a longer holding period which may not be suitable for all investors. The 60/30/10 rule is updating investing percentages to reflect a market that is more inclusive, dynamic, and welcoming.
The Importance of Using a Trusted Platform When Investing in Startups
The new opportunity of adding alternatives to your portfolio by investing in startups requires caution. Now is not the time to “spray and pray,” where you throw money at every new startup that comes your way in the hope that something sticks.
There are definite advantages to using a trusted platform for alternatives investing. When investing in startups, it is critical to choose a platform with a demonstrated network with the startup ecosystem. Additionally, the proven experience to source and curate companies with legitimate potential to “make it big” along with rigorous due diligence capabilities offered by a platform are equally important when you decide to invest through a platform.
Securities offered on the Propel(x) platforCertain opportunities may be offered offline by Hubble Investments, member FINRA / SIPC and an affiliate of Propel(x). As a registered broker-dealer, Hubble Investments is held to a high regulatory standard, which includes the expectation of vetting of investment opportunities, proper due diligence and high level of care for investors.
Take the Step Into a Different Future
In the long term, fintech platforms specializing in startup investing will expand the kind of startups which are able to access investor capital and thus move to the next level.
Many small startups with brilliant ideas and great potential have struggled to get off the ground in the past because of difficulty accessing capital. By expanding the investor base these fintech platforms are making it easier for startups to access capital and bring their innovations to market.
Many of the startups featured on these platforms are at the forefront of developing potential solutions for enormous challenges such as climate change and global health problems. Consumer demand for investments in companies with an Environmental, Social, and Governance (ESG) focus has been growing rapidly across the globe, and we believe the future demand simply cannot be met by existing publicly traded companies.
Startup investing truly opens the door for funding and support for new levels of entrepreneurship, including companies coming out of universities, research labs, incubator hubs, and other less traditional commercial avenues.
Platforms like Propel(x) not only allow these entrepreneurs to access otherwise unavailable capital, but also introduce them to a more diverse set of investors who may be able to support their initiatives in other ways.
Clearly, the investing landscape in North America and around the globe has changed dramatically in recent years. Unfortunately, the way many consumers and their financial advisors approach investing has lagged this change and they remain stuck in an outdated and tired view of how an investment portfolio should be structured.
As technology continues to democratize and modernize how individuals, financial advisors, and institutions invest, the availability of alternatives has the potential to change the antiquated 70/30 percentage approach to a new 60/30/10 (or similar) strategy.
The opportunity and ability to invest in cutting-edge technology companies at the ground floor in a way that has low correlation to public markets and aligned with increasingly important and relevant ESG causes will only continue to grow in a brave, new, and exciting future.
This article is for informational purposes only. We do not provide legal, financial, or tax advice and investors should consult their advisors prior to making any investment and in determining the investor’s appropriate asset allocation. As with any investment, past performance is no guarantee of future performance, and any investment decision must balance the risk against the potential return.
Private investments are highly illiquid and risky and are not suitable for all investors. There is no guarantee that a liquidity event will ever take place. Even if a liquidity event takes place there is no guarantee that the investor will earn a return. Private placements are high-risk and there is a risk that an investor could lose their entire investment.
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