Investing in asset classes that do not correlate with one another can help reduce overall portfolio volatility and generate higher returns with Caliber Funds over the long term.
However, these investments require extensive research and due diligence to ensure their legitimacy.
This includes physical collectibles like artwork, antiques, and homes, as well as alternative assets such as hedge funds and private equity.
Diversification
Diversification reduces the risk of significant losses from large falls in single assets or sectors. It also dampens the overall volatility of the portfolio, giving investors a more steady return profile.
This is important because two types of risks come with investing: industry-specific and systematic. The latter is often caused by events that affect every company in the market, such as inflation rates, interest rates, political instability, and war.
On the other hand, industry-specific risks can occur for various reasons and can be difficult to predict. For example, a company may lose customers due to changing consumer habits (i.e., traveling less and consuming streaming services more). Having investments across industries can help diversify against this type of risk. Diversification can occur at many levels: by asset class, geographical location, security duration, or even individual companies. However, it is important to balance diversification with your personal financial goals and level of comfort with risk.
Lower Volatility
Investing in non-correlated assets can help investors achieve their investment goals by reducing market risk and increasing long-term gains. But there are some things to remember when exploring these asset classes.
For instance, some non-correlated assets may have less liquidity than public equities. This is often because they are one of a kind (like art and NFTs), are not easily liquidated, or are only traded on secondary markets.
In addition, some macroeconomic factors are likely to have a greater impact on certain types of assets than others. For example, changes in inflation may lead to different price movements for physical assets like gold versus financial assets like stocks.
A low volatility strategy seeks to limit downside capture by investing in securities with lower historical beta and standard deviation than the broad market. These strategies can be a great complement to core equity allocations during periods of expected heightened market volatility. This can allow you to stay invested during market downdrafts, helping to improve long-term performance.
Taxes
As we navigate volatile markets, it is a good time to consider the role of non-correlated assets. The right strategies can help transform market volatility into tax benefits.
In investment terms, asset correlation measures how two different investments move in tandem. When one goes down, the other often follows; when one goes up, the other may drop. Assets with a correlation of zero are considered uncorrelated, while those with a positive or negative correlation are correlated.
Non-correlated assets tend to be more independent of each other and general market trends. This helps them resist market drops, even when other assets in your portfolio take a nosedive.
Income
If you invest in non-correlated assets that provide income, it can offset the impact of a steep market downturn. In particular, alternative investments like private real estate and closed-end interval funds offer a stable stream of dividends in contrast to public equity and bond yields.
Some non-correlated investments can also hedge against rising inflation or hawkish monetary policy. Gold, for example, has less than a 0.5% correlation to stocks and historically correlates more with a good market and less with a bad market.
Other alternatives to consider include physical collectibles backed by niche financial markets, such as artwork, antiques, jewelry, and vehicles. These types of assets typically have a stable value. They can be easily sold or passed down to future generations, making them non-correlated assets with values that are independent of the stock market. In addition, these assets often earn interest that may offset some of the losses incurred during a sharp downturn.
