Learn with Alto IRA: Alternative Investments

Module 1

Why alternatives?

1 of 6: portfolio evolution

Alternatives: part of how portfolio strategy is evolving

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The traditional stock-and-bond portfolio

For decades, most individual investor portfolios have been built around stocks and bonds. These assets became the default because they were widely available and easy to buy through public markets. For many investors, the 60/40 model is still considered the standard approach.

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Access shaped portfolio construction

Stocks and bonds became the building blocks of most portfolios in large part because they were the most accessible options. Public exchanges, daily pricing and low minimums made them practical for individual investors in a way that other asset types were not.

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What’s changed in portfolio construction

In recent years, public market volatility and increasing correlation between stocks and bonds have pushed investors to look beyond the traditional model. At the same time, new technology and platforms have made it easier to access investment types that were previously out of reach for most individual investors.

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Where alternatives fit in

Today, a growing number of investors are looking beyond stocks and bonds when building long-term portfolios. Alternative investments are a part of that shift. They’re not a replacement for traditional assets, but an expansion of what’s available.

Why alternatives?

Introduction

Welcome! This self-paced module will introduce you to alternatives: what they are, the role they can play in portfolios, and what to consider before investing.

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We’ll cover:

How portfolio strategy is changing
What diversification is and why it matters
What alternatives are and are not
Common types of alternative assets
The role alts can play in a well-rounded portfolio
Important considerations when investing in alts

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Understanding diversification

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What diversification actually means

Diversification means spreading exposure across different types of investments. Investors can diversify based on several factors, including sector, asset class and liquidity. The goal is to avoid relying too heavily on any single risk or return profile.

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QUIZ: Multiple Choice

Achieving portfolio diversification involves creating variation across investments based on:

Sector

Asset class

Liquidity

All of the above

Answer

All of the above. Diversification comes in many forms, and it’s important to consider what factors are most relevant to your needs and goals.

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The risk of correlation

Correlation refers to how investments move in relation to each other, responding to market conditions in similar ways. Having too much correlation in a portfolio can be risky: in a market downturn, a highly correlated portfolio may see larger portions of its value decline at once.

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The role of non-correlated assets

Some assets move differently from one another. When one struggles, another may hold steady or perform in ways that are unrelated to broader market trends. Assets that don’t move in lockstep are often described as “non-correlated.” A mix of non-correlated assets in a portfolio may help reduce overall volatility.

Coffee

Travel

Commodities

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When traditional diversification falls short

Stocks and bonds don’t always behave as expected. During certain market conditions, they can become more closely correlated, which reduces the diversification benefit investors expect from a portfolio split between the two.

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Correlation during market stress

In times of market stress, many public assets may decline at the same time. This clustering effect can amplify portfolio volatility. Understanding this dynamic is important for managing risk expectations.

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Concentration risk in public markets

Public markets can also become concentrated. A small number of companies or sectors may drive a large share of returns, which can increase exposure to specific risks in ways that aren’t always obvious.

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Diversifying beyond public markets

Diversification can happen across asset classes, strategies, geographies and structures. Alternatives are one way investors can gain exposure beyond traditional public markets, introducing different risk and return drivers into a portfolio.

3 OF 6: DEFINING ALTERNATIVES

Defining alternative investments

3 OF 6: DEFINING ALTERNATIVES

What alternatives are and aren’t

The term "alternative" describes how an investment is structured and accessed, not its quality or risk level. Alternatives are not a single asset class. They are not inherently safer or riskier than traditional investments. And they are not only accessible to institutional investors.

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How alternatives differ from traditional assets

Because most alternatives are privately held rather than publicly traded, they work differently from the assets you may be used to. That has practical implications for how long you hold them, how they're priced, and when you can sell.

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Structure, liquidity and valuation

Alternative investments often have longer holding periods than traditional assets. Liquidity may be limited, and pricing may not be available daily. Valuations are typically updated periodically rather than in real time.

3 OF 6: DEFINING ALTERNATIVES

QUIZ: True or false?

True or false: Alternatives are inherently riskier than traditional investments.

True

False

Answer

False. Alternatives are not a single asset class, and risk and return profiles vary widely.

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Risk and return characteristics

Alternatives can introduce different types of risk and return potential, including operational risk, manager risk and illiquidity risk. Understanding these characteristics is essential before investing. Thorough due diligence can help reduce some of these risks, but not eliminate them.