What is stock market volatility?

Stock market volatility refers to a degree of variation in the price of a stock or the overall market. Volatility reflects fluctuations that can be driven by a variety of factors like economic indicators, investor sentiment, and geopolitical events.

That’s why we’ve all heard the expression, “Don’t put all of your eggs in one basket,” applied to investing. Many of the most successful investors-including the ultra-wealthy, investment banks, university endowments, and sovereign wealth funds diversify with alternatives to keep afloat during times of high stock market volatility.

Rather than allocating nearly all of their funds to “traditional” investments-such as publicly listed equities, bonds, and currencies,ultra-high-net-worth investors allocate, on average, 50% of their investment funds to alternative assets, according to research by KKR, a global investment firm.

So while the average retirement portfolio might be composed of 60% stocks and 40% bonds(give or take), depending on risk profile and investment horizon,an ultra-wealthy investor might instead allocate 30% to stocks and bonds, 30% to private equity, 10% to real estate, and the rest to art, crypto, and private credit.* And that diversification may give them a big advantage.

Not only do some of these investments offer the potential for outsized returns due to the growth potential of alternative assets, spreading funds across a handful of asset classes also can help to reduce the risk that significant declines in one asset class will bring down the entire portfolio. No wonder global asset management groups like Janus Henderson believe there’s a strong case for investors allocating more of their portfolios to alternatives, especially as stock market volatility increases.

These include investments in:

  • Startups, private equity, venture capital, and other pre-IPO companies
  • Residential and commercial real estate
  • Farmland and other land or mineral rights
  • Luxury items, like art, classic cars, sports memorabilia, and wine
  • Crypto assets and funds
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