Alternative asset allocation strategies for retail investors
Diversification is one of the primary tenets of modern investing. This approach involves spreading the investments in a portfolio across multiple asset classes so that exposure to any given one is limited. While this strategy doesn’t guarantee profit or guard a portfolio against losses, it can help reduce volatility over time.
Alternative assets can be an integral part of a diversification strategy. Thanks to changes in technology and legislation, retail investors now have a broad range of alternatives to choose from. Perhaps more importantly, alternatives as a whole typically show a low correlation to the performance of more traditional asset classes, which can reduce risk and the impact of market fluctuations on a portfolio’s overall performance.
In this blog post, we take a look at asset allocation strategies for retail investors in both traditional and alternative markets.
Allocation strategies for retail investors
As diverse as the investors who use them, asset allocation strategies range from active and aggressive to passive and more conservative. Which strategy a portfolio manager follows depends on the assets’ respective markets, as well as the investor’s individual goals, age, and risk tolerance. We’ll dig deeper into the factors that determine appropriate allocation strategies a little later in this post.
Traditional asset allocation
Traditional assets include stocks, bonds, and cash. Allocation strategies in this arena are broadly classified by their resulting risk profile. The more “aggressive” the allocation strategy, the more higher-risk assets (stocks) that portfolio will contain. For example:
- Conservative traditional asset portfolio: 40% stocks, 40% bonds, 20% cash
- Moderate traditional asset portfolio: 60% stocks, 30% bonds, 10% cash
- Aggressive traditional asset portfolio: 80% stocks, 15% bonds, 5% cash
Alternative asset allocation
“Alternative assets” (or simply “alternatives”) is a term used to describe any type of asset that falls outside those considered traditional. There are a multitude of alternatives for retail investors to choose from, including more mainstream assets like real estate, private equity, hedge funds, and commodities, as well as lesser-known assets such as collectibles, franchises, and cryptocurrency.
Because the alternatives landscape is so diverse, it’s impossible to quantify every possible allocation scheme in a single blog post. However, there are some best practices investors can implement to help build an efficient portfolio:
- Diversify by geography. Investing in a variety of assets across different geographic regions can help mitigate risks associated with any one investment or area. Markets can experience regional contractions due to political, economic, or even environmental conditions. In addition, the risks associated with any of these three factors differ across geographies. Diversifying investments across different regions can help spread out this risk and increase potential returns.
- Diversify by vintage. Vintage year is a particularly important factor for alternatives like collectibles, fine art, and wine. Since it’s impossible to predict the future, allocating alternative investments over multiple vintages helps reduce risk exposure from outside forces like economic fluctuations or natural disasters. According to this article from J.P. Morgan, many investors tend to over-allocate initially in a misguided attempt to “ramp up” performance. Instead, J.P. Morgan recommends that investors allocate capital constantly for three to five vintage years, and recycle capital thereafter.
- Diversify by asset manager. This is probably one of the less obvious means of diversifying a portfolio, but no less critical to optimal performance. We’ve spoken at length about the importance of thorough due diligence when choosing which investment advisors and platforms to work with. Even when you find a shortlist of companies that aligns with your goals and values, it’s worth allocating assets through more than one, if possible. This effectively creates a diverse mix of investment expertise.
Factors influencing allocation strategy choice
Developing an efficient allocation strategy is a personal endeavor, and no specific mix has ever proven to be consistently superior. However, there are several factors to consider that can help retail investors determine which asset mix is most appropriate for them:
- Risk tolerance: How much risk are you comfortable with in your portfolio? More importantly, how much risk can you afford to have in your portfolio?
- Time horizon: How liquid is the asset? Does it require a number of years to realize returns? Are you able to liquidate the asset in a reasonable amount of time if you need liquid capital on short notice?
- Investment objectives: Are you investing with the goal of creating a supplemental stream of passive income? To build a portfolio around specific environmental, social, and governance (ESG) interests? To build a long-term nest egg?
- Market conditions and opportunities: Are there any unique risks associated with your chosen investments? Unique opportunities? How volatile is the market?
Choosing the right allocation strategy
Diversification is crucial when it comes to investing, especially in alternative assets. Keep in mind, however, that all the information outlined here amounts only to general guidelines as to how retail investors can allocate these assets as a part of their investment strategies. Each investor must determine their own goals and risk tolerance, and then develop a tailored allocation strategy (with help from a trusted, experienced professional) based on those individual factors and market conditions.
In addition, assets that were once exclusively available to high-net-worth individuals and institutional firms are now being made accessible to retail investors. An optimal allocation strategy will leave room to take advantage of these new opportunities to diversify.
Franchises as an alternative asset
For decades, franchise investing has been out of reach for the average person – and FranShares seeks to end that. We’re working to bring passive franchise investing to more investors using a unique fractionalized approach that allows people from all walks of life to own part of pre-vetted managed franchises with great return potential. Plus, our deep industry knowledge, paired with no fees, means that we help investors get maximum returns safely – so no one loses their shirt. Our mission is to help investors reap the benefits of franchise investing with a business model that offers:
- Passive income
Our best-in-class franchise management team ensures that our investors enjoy truly passive income through quarterly distributions without having to manage the franchise. In other words, we do the legwork while you enjoy the returns.
- Flexible capital commitment
We offer investors the opportunity to invest as little as $500, although our model also appeals to ultra-high-net-worth investors. Our platform allows people of all income levels to become fractional franchise owners with the ability to invest the right amount of capital for their own personal circumstances.
- High-yield diversification
Franchises are real assets with little to no correlation with the overall stock market; thus, they act as a hedge against inflation and are not subject to the same level of volatility.
Furthermore, our fractionalized ownership approach allows investors to fully diversify their franchise holdings. Owning a portfolio of franchises across different geographies and industries creates an effective buffer against challenges that may shut down a single franchise or location, such as service franchises closing temporarily during pandemic lockdowns.
- Low risk
To minimize volatility and give our investors peace of mind, FranShares only invests in recession-resistant franchises with a track record of success. We perform all due diligence and thoroughly vet each franchise partner for strong brand recognition and market positioning.
The franchise industry is regulated by the Federal Trade Commission (FTC); and as a registered investment vehicle, FranShares is also regulated by the Securities and Exchange Commission (SEC). The FTC requires full disclosure of each franchisee’s background, financials, and performance. In addition, we provide our investors with reporting and regulatory compliance documentation above and beyond what those regulators require.
Get started with FranShares
If you’re an investor looking to incorporate franchises into your portfolio, investing fractionally with FranShares offers high earning potential and diversification in a completely passive investment model.
To learn more about FranShares and this unique opportunity, speak to our Investor Relations team.