The Top 7 Reasons to Diversify Beyond Public Stocks and Bonds
Charleston, SC - March 13th, 2025
Author: Christian Salomone
Chief Investment Officer
Recent headlines can be frightening for investors: The S&P 500 posts its worst performance since 2022. Bloodbath on Wall Street. Recession fears rise. For many individual investors, such rhetoric causes anxiety, and rightly so. After all, an investment portfolio is the safeguard for an investor’s future.
However, investors can take steps to make portfolios more resilient to sharp declines and systemic risks. In times of economic uncertainty and market volatility, alternative asset classes—such as real estate, venture capital, private equity, and private credit—can play a crucial role in creating a resilient, well-diversified investment portfolio.
Indeed, times like these are a reminder of the benefits that alternative and private-market assets provide accredited investors for enhancing returns, lowering correlation to public markets, and accessing investments not typically available to individual investors.
Here are the top seven reasons why incorporating alternative assets into your portfolio may make sense, especially in periods of heightened economic uncertainty:
Added Diversification
Since Harry Markowitz won the Nobel Prize for developing Modern Portfolio Theory, diversification has been one of the fundamental principles of investing. He famously stated that diversification is “the only true free lunch in investing.” But as we saw during the market selloff of 2022 – where stocks and bonds both lost value – simply adding bonds to a stock portfolio does not necessarily mean you are diversified. Alternative assets can offer exposure to different economic drivers than public equities and bonds. By allocating capital across various asset classes, investors reduce their portfolio’s correlation to the public markets.
Mitigation of Volatility and Downside Risk
Private market investments are not valued by the minute, nor are they necessarily liquid. In volatile markets, this is a distinct advantage, since valuations are not hostage to the daily price swings seen in stock markets and illiquidity can save investors from their worst impulses. This stability can help smooth out portfolio performance, reducing the psychological stress associated with volatile markets while maintaining long-term growth potential. Indeed, this stability is why most large institutional investors, like pension funds and endowments, often keep as much as half of their portfolios in private markets.
Lower Correlation to Public Markets
Unlike stocks and bonds, which react sharply to market volatility, alternative assets typically exhibit lower correlation to broader market movements. For example, real estate values are driven by supply and demand dynamics in local markets, while private equity investments are based on long-term company fundamentals rather than the ebbs and flows of daily market sentiment.
Flexibility in Market Cycles
Alternative investments tend to have different sensitivity to economic cycles compared to traditional markets, and that helps build stable investments. Microsoft was founded in 1975, amid deep inflation and weak public markets. Similarly, companies like Uber and Airbnb got their starts during the Great Financial Crisis, when capital was constrained, but human expertise was not. While public equities might suffer during a recession, private equity firms can take advantage of lower valuations to acquire strong businesses at attractive prices. Similarly, real estate investors can benefit from demographic trends and supply constraints that drive long-term value growth.
Hedge Against Inflation
Worried about inflation because of interest rates or tariffs? Alternative investments can be an effective hedge against inflation. Tangible alternative assets like real estate, infrastructure and commodities often perform well during inflationary periods as their cashflows typically rise with inflation, thus driving asset appreciation. Private credit can also provide a hedge, as many loans are structured with floating interest rates that adjust higher if the Federal Reserve raises interest rates to fight inflation.
Access to Non-Public Investment Opportunities
Roughly 87% of companies in the USA with revenues over $100m are privately held. Venture capital and private equity offer access to these high-growth companies before they go public. This early exposure can lead to substantial gains that are not available to investors who only participate in public markets. Additionally, private credit provides opportunities to lend to companies with strong fundamentals that may not qualify for traditional bank loans.
Income Generation
Alternative assets like private credit, real estate, and infrastructure investments can provide consistent cash flow through interest payments, rental income, or dividends. These income streams can be particularly attractive during periods of stock market volatility, offering stability when public markets experience downturns.
In summary, during heightened economic uncertainty, rising inflation, and market volatility, alternative asset classes provide a compelling case for inclusion in a well-diversified portfolio. By allocating capital to private equity, venture capital, real estate, and private credit, investors can access higher potential returns, lower market correlation, and enhanced income opportunities.
While alternative investments require careful due diligence and often have longer investment horizons, their ability to help investors mitigate risk and unlock new growth potential makes them an essential consideration for modern portfolio allocation strategy. Investors seeking to build wealth and preserve capital over the long term should strongly consider diversifying beyond stocks and bonds—just as the world’s most sophisticated investors have done for decades.
