Clockwise from top left: Tony Gillett, Joshua Dalton, Joshua Blythe and Helen Nan

The fundamental character of a true alternative asset or strategy, is that it will have low or negative correlation to results from the traditional asset class of fixed interest, equities or property, Tony Gillett, certified financial planner at Retirewell says.

“This means in performance terms, alternatives can act as a stabiliser or enhancer to overall portfolio returns,” Gillett tells Professional Planner.

Gillett divides alternatives into two sub-categories – alternative assets or alternative strategies.

“Then within each of those sub-categories, we divide into defensive (three-year standard deviation below five), and growth (three-year standard deviation into the five to 10 range),” Gillett says.

“We will rarely use an alternative investment with a standard deviation over 10, it’s too volatile.”

Gillett says the alternative manager should be reducing overall portfolio volatility and enhancing overall portfolio returns over time.

“If the alternative manager you know is doing their jobs properly, the inclusion of alternatives will work in any environment, irrespective of what is happening in traditional markets,” Gillett says.

But Compound Freedom certified financial planner Helen Nan says no investment is perfect.

Whether it’s a real estate opportunity, cryptocurrencies, collectibles or commodities, it’s important to consider the potential drawbacks and assess their suitability on individual circumstances, she adds.

Real estate for example, provides potential for rental income, appreciation and a sense of control being a physical asset. However, it also presents pressure in high interest environments and illiquidity.

Cryptocurrencies offer diversification potential and high growth opportunities, but there’s a lack if intrinsic value, high volatility and potential for significant portfolio swings.

Collectibles provide non-financial enjoyment and potential for value appreciation, but there can be extra costs associated with maintenance, storage and insurance, and uncertain market demand.

Commodities such as gold can hedge against inflation and have low correlation with traditional assets, but there’s a lack of income generation, storage and insurance costs.