Invest
An argument for alternatives – including crypto
We’re all familiar with traditional assets. The share market, real estate, bonds and cash are generally considered traditional investments as they’re well-known and time-honoured.
An argument for alternatives – including crypto
We’re all familiar with traditional assets. The share market, real estate, bonds and cash are generally considered traditional investments as they’re well-known and time-honoured.
Increasingly, alternative assets are becoming part of people’s portfolios. Alternatives are essentially everything other than traditional assets – though, more accurately, they’re assets that don’t correlate with traditional assets.
They can be tangible things such as art, wine (just don’t drink it all!), precious metals, antiques, coins or stamps. But they can also be financial assets such as intellectual property, venture capital or financial derivatives.
So, where do cryptoassets fit in?
Cryptocurrency and cryptoassets are seen as an emerging class of alternatives, bought and traded much like foreign currencies. Bitcoin, released in 2009, was the first cryptocurrency on the market. Now there are thousands of coins and tokens to choose from.
Unlike central banking systems and their currencies, cryptoassets are typically decentralised, permanently written to a shared ledger – known as a blockchain – to keep track of who owns which assets.
Why alternatives?
In the past, people have often stuck pretty firmly to traditional assets to make up their financial portfolios. They had been a reliable source of steady growth.
But then came the global financial crisis of 2008.
Suddenly, markets crashed – and so too did many traditional investment portfolios.
Enter alternatives.
It’s not a coincidence that bitcoin was released in 2009. Its creation was something of a protest of centralised systems and the bank bailouts that followed the GFC.
Historically, alternatives have been seen as more speculative investments – and many are. But there is a big push towards alternatives as a means of diversifying your portfolio, and therefore hedging against another big crash of traditional assets.
Alternatives approach financial markets in a different way to traditional investments, meaning they can provide returns that have little correlation with the more traditional approaches.
If traditional investments do fall, it should mean that a good, uncorrelated alternative asset remains steady, or goes up in value, or at least doesn’t fall as much.
Investing in a low return world
There’s another reason for the move to alternatives – traditional assets may have calmed down since the GFC, but they are delivering lower returns than they have in the past.
Often the potential returns for alternatives can be much greater than traditional assets, although they can carry greater risk as well.
As an example of how alternatives might fit into your investment portfolio, the investment bank Morgan Stanley suggests investors allocate 22 per cent of their investment into alternative assets to achieve a moderate risk/return profile. Merrill Lynch, another financial giant, suggests that the sweet spot sits around 20 per cent for their typical clients.
Basically, adding some alternatives into your portfolio is a great way to diversify – making you a happier, more measured investor!
Hedging your hedge
There’s a saying in crypto – ‘going down the rabbit hole’. It’s something that happens to new investors when they start to read about the technology and market – it can be addictive.
If we may, let’s go down the rabbit hole, just for a moment. Investing in cryptoassets like bitcoin and ethereum can be a good way to hedge against traditional assets and bring some diversification into your portfolio.
But there’s something worth noting when investing in alternatives: your alternatives can correlate with each other. This is where things can get tricky.
The numbers aren’t so important – if it’s red, it means that cryptocurrency tracks with another.
Ideally, if you’re diversifying your portfolio with alternatives, you want to make sure that those alternatives don’t correlate with each other – so your portfolio is truly hedged against any big market swings.
That could mean making a diverse basket of cryptoassets, or it could mean holding some cryptoassets and some of the other alternative assets we listed above, or another type of investment entirely.
Alternatives are a great way to round out your portfolio – but if you’re looking for a responsible risk profile, they should never make up the whole thing.
Tom Surman is a chartered accountant, financial adviser, and CEO of Every Capital, Australia’s first retail investment fund for cryptoassets.
Investment insights
Where should you invest when interest rates are so low?
With the cash rate close to zero, this will have big implications for how you should invest your money to generate the best return. So, what are the options and which asset classes will best enable yo...Read more
Investment insights
Dividends in Australian shares – is the COVID lockdown lifting?
What happened during reporting season? Andrew Zenonos asks. ...Read more
Investment insights
How will falling Chinese foreign investment affect the Australian property market?
Foreign investment from China in Australian real estate has been quietly on the decline for several years. It peaked in 2015-16 at $31.9 billion and dropped significantly to $6.1 billion in 2018-19, ...Read more
Investment insights
What makes a dud investment a dud?
A wrong investment is only wrong to the wrong person, an investment director has flagged. ...Read more
Investment insights
3 ways to pandemic-proof a portfolio
There are a number of lessons high-net-worth investors can teach the rest of us about wealth preservation during a downturn, according to an investment specialist. ...Read more
Investment insights
Investors are now linking the financial sector to climate change
Four in five Australians think that the financial sector needs to step up when it comes to climate change – stating that it has a role to play in ensuring Australia can be resilient to future extrem...Read more
Investment insights
9 in 10 Aussies want their money put to good use
A majority of Australians now expect super funds, banks, financial advisers and other financial institutions to invest their money in a responsible and ethical manner, it has been revealed. ...Read more
Investment insights
The risks and opportunities in 21st century investing
What a start to the third decade of the 21st century. As 2019 closed, the eastern states of Australia experienced some of the worst and most devastating bushfires on record. Then, just when life was ...Read more
Investment insights
Where should you invest when interest rates are so low?
With the cash rate close to zero, this will have big implications for how you should invest your money to generate the best return. So, what are the options and which asset classes will best enable yo...Read more
Investment insights
Dividends in Australian shares – is the COVID lockdown lifting?
What happened during reporting season? Andrew Zenonos asks. ...Read more
Investment insights
How will falling Chinese foreign investment affect the Australian property market?
Foreign investment from China in Australian real estate has been quietly on the decline for several years. It peaked in 2015-16 at $31.9 billion and dropped significantly to $6.1 billion in 2018-19, ...Read more
Investment insights
What makes a dud investment a dud?
A wrong investment is only wrong to the wrong person, an investment director has flagged. ...Read more
Investment insights
3 ways to pandemic-proof a portfolio
There are a number of lessons high-net-worth investors can teach the rest of us about wealth preservation during a downturn, according to an investment specialist. ...Read more
Investment insights
Investors are now linking the financial sector to climate change
Four in five Australians think that the financial sector needs to step up when it comes to climate change – stating that it has a role to play in ensuring Australia can be resilient to future extrem...Read more
Investment insights
9 in 10 Aussies want their money put to good use
A majority of Australians now expect super funds, banks, financial advisers and other financial institutions to invest their money in a responsible and ethical manner, it has been revealed. ...Read more
Investment insights
The risks and opportunities in 21st century investing
What a start to the third decade of the 21st century. As 2019 closed, the eastern states of Australia experienced some of the worst and most devastating bushfires on record. Then, just when life was ...Read more
More articles
Website Notifications
Get notifications in real-time for staying up to date with content that matters to you.
