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Navigating Investment Challenges: The Importance of Portfolio Diversification and Alternative Assets

Investing in today's world can be challenging, especially with unprecedented events impacting many assets. The emergence of the Coronavirus pandemic in 2020 caused significant complications for the investment landscape, from the Bank of England (BoE) cutting their base rate to an all-time low to extreme volatility within the equity markets. The past several years, particularly the last 12 months, have emphasized the core principle of portfolio diversification as crucial in weathering times of substantial market turbulence.

As the UK's economy began to recover after the end of Coronavirus-related restrictions tentatively, the war in Ukraine and soaring inflation brought rise to a cost of living crisis, further unsettling many assets. Whilst inflation dipped slightly to 9.9% in August, down from 10.1% in July, it remains uncomfortably close to four-decade highs, well above the BoE's 2% target, and forecasts suggest it could still reach 13% by Q4.

In this economic climate, traditional investment options such as savings accounts and Cash ISAs, which continue to offer low-interest rates of circa 2%, are unlikely to be the most appropriate option for investors looking for an asset with growth potential. Investors with a suitable appetite for risk may have traditionally turned to equities. However, current market conditions, particularly interest rate hikes in both the UK and the US, as central banks endeavour to contend with rising inflation, mean we're witnessing frequent and often severe fluctuations within global markets.

These fluctuations were exemplified in the market's response to Chancellor Kwasi Kwarteng's mini-Budget on Friday, 23rd September, when the FTSE 100 fell 2% to a three-month closing low. On Monday, 26th September, the S&P 500 posted a new closing low at a level not seen since December 2020, whilst the Dow Jones finished the same day in bear market territory.

Despite these challenges, cash and equities remain essential in a diversified portfolio. Money (up to £85,000) is protected by the Financial Services Compensation Scheme (FSCS) for those who want an element of security within their portfolio. Though savings accounts won't see your capital grow, they can allow easy access to funds at nearly no risk of loss.

Moreover, though the equities markets are prone to short and sometimes medium-term instability, they can offer attractive long-term returns for investors willing and able to take on the associated risks and give their investments time to ride out fluctuations and falls in value. Over the past 35 years, the average annual return for the FTSE 100 was 7.8% (assuming dividends are reinvested). It's important to remember that past performance should not be used to indicate future success.

However, experts agree that now more than ever, a portfolio comprising just cash and equities or the revered 60:40 portfolio allocation is not diversified enough. Investors should consider further diversifying their portfolios, adding assets that can be used for volatility dampening and that have the potential to generate attractive returns while also boosting a portfolio in other vital ways.

JP Morgan's 2022 Global Alternatives Outlook report emphasizes embracing a "hybrid model for investing in a changing market environment" by diversifying with alternative investments and property. According to Cerulli Associates' research, financial advisors increasingly look to diversify their clients' portfolios with alternatives, primarily aiming to reduce exposure to public markets and protect against volatility and downside risk. High-net-worth investors already include higher weightings of alternative assets in their portfolios than five years ago, which is crucial for experienced investors with the appropriate appetite for risk.

With their lack of correlation with mainstream assets, alternative investments can help diversify a portfolio and are becoming more accessible to investors. Residential property, in particular, has shown resilience amidst the wavering economic backdrop. The UK housing market witnessed some benefits due to Covid-19, leading to the busiest year for the market in over a decade.

HJ Collection have revolutionised the property market with a fixed-rate managed portfolio bond comprising multiple developers and has developed a reputation for delivering quality, well-researched, and highly lucrative property investment opportunities to its clients. The HJ Collection’s professionally managed bond combines portfolio diversification with bricks & mortar security.

To learn more about HJ Collection, please call us on 0207 117 2583.


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