Skip to Main Content
HBS Online
  • Courses
    Open Courses Mega Menu
    • Business Essentials
      • Credential of Readiness (CORe)
      • Business Analytics
      • Economics for Managers
      • Financial Accounting
    • Leadership & Management
      • Leadership Principles
      • Management Essentials
      • Negotiation Mastery
      • Organizational Leadership
      • Strategy Execution
      • Power and Influence for Positive Impact
    • Entrepreneurship & Innovation
      • Entrepreneurship Essentials
      • Disruptive Strategy
      • Negotiation Mastery
      • Design Thinking and Innovation
    • Strategy
      • Strategy Execution
      • Business Strategy
      • Economics for Managers
      • Disruptive Strategy
      • Global Business
      • Sustainable Business Strategy
    • Finance & Accounting
      • Financial Accounting
      • Leading with Finance
      • Alternative Investments
      • Sustainable Investing
    • Business in Society
      • Sustainable Business Strategy
      • Global Business
      • Sustainable Investing
      • Power and Influence for Positive Impact
    • All Courses
  • For Organizations
    Open For Organizations Mega Menu
    • Corporate Learning
      Help your employees master essential business concepts, improve effectiveness, and expand leadership capabilities.
    • Academic Solutions
      Integrate HBS Online courses into your curriculum to support programs and create unique educational opportunities.
    • Need Help?
      • Frequently Asked Questions
      • Contact Us
    • Black, Latinx, and underrepresented minority professionals
      Pathways to Business

      Stories designed to inspire future business leaders.

  • Insights
    Open Insights Mega Menu
    • Business Insights Blog
      • Career Development
      • Communication
      • Decision-Making
      • Earning Your MBA
      • Entrepreneurship & Innovation
      • Finance
      • Leadership
      • Management
      • Negotiation
      • Strategy
    • All Topics
    • Sample Business Lessons and E-Books

      Gain new insights and knowledge from leading faculty and industry experts.

    • Free Guide

      Learn how to formulate a successful business strategy.

  • More Info
    Open More Info Mega Menu
    • Learning Experience
      Master real-world business skills with our immersive platform and engaged community.
    • Certificates, Credentials, & Credits
      Learn how completing courses can boost your resume and move your career forward.
    • Learning Tracks
      Take your career to the next level with this specialization.
    • Financing & Policies
      • Employer Reimbursement
      • Payment & Financial Aid
      • Policies
    • Connect
      • Student Stories
      • Community
    • Need Help?
      • Frequently Asked Questions
      • Request Information
    • Apply Now
Login
My Courses
Access your courses and engage with your peers
My Account
Manage your account, applications, and payments.
HBS Home
  • About HBS
  • Academic Programs
  • Alumni
  • Faculty & Research
  • Baker Library
  • Giving
  • Harvard Business Review
  • Initiatives
  • News
  • Recruit
  • Map / Directions
HBS Online
  • Courses
  • Business Essentials
  • Leadership & Management
  • Entrepreneurship & Innovation
  • Strategy
  • Finance & Accounting
  • Business in Society
  • For Organizations
  • Insights
  • More Info
  • About
  • Media Coverage
  • Founding Donors
  • Leadership Team
  • Careers
  • My Courses
  • My Account
  • Apply Now
  • …→
  • Harvard Business School→
  • HBS Online→
  • Business Insights→

Business Insights

Harvard Business School Online's Business Insights Blog provides the career insights you need to achieve your goals and gain confidence in your business skills.

 
Filter Results Arrow Down Arrow Up

Topics

Topics

  • Accounting
  • Analytics
  • Business Essentials
  • Business in Society
  • Career Development
  • Communication
  • Community
  • ConneXt
  • Decision-Making
  • Earning Your MBA
  • Entrepreneurship & Innovation
  • Finance
  • Leadership
  • Management
  • Marketing
  • Negotiation
  • News & Events
  • Productivity
  • Staff Spotlight
  • Strategy
  • Student Profiles
  • Technology
  • Work-Life Balance

Courses

Courses

  • Alternative Investments
  • Business Analytics
  • Business Strategy
  • CORe
  • Design Thinking and Innovation
  • Disruptive Strategy
  • Economics for Managers
  • Entrepreneurship Essentials
  • Financial Accounting
  • Global Business
  • Leadership Principles
  • Leading with Finance
  • Management Essentials
  • Negotiation Mastery
  • Organizational Leadership
  • Power and Influence for Positive Impact
  • Strategy Execution
  • Sustainable Business Strategy
  • Sustainable Investing
Subscribe to the Blog
RSS feed

Filters

Topics

Topics

  • Accounting
  • Analytics
  • Business Essentials
  • Business in Society
  • Career Development
  • Communication
  • Community
  • ConneXt
  • Decision-Making
  • Earning Your MBA
  • Entrepreneurship & Innovation
  • Finance
  • Leadership
  • Management
  • Marketing
  • Negotiation
  • News & Events
  • Productivity
  • Staff Spotlight
  • Strategy
  • Student Profiles
  • Technology
  • Work-Life Balance

Courses

Courses

  • Alternative Investments
  • Business Analytics
  • Business Strategy
  • CORe
  • Design Thinking and Innovation
  • Disruptive Strategy
  • Economics for Managers
  • Entrepreneurship Essentials
  • Financial Accounting
  • Global Business
  • Leadership Principles
  • Leading with Finance
  • Management Essentials
  • Negotiation Mastery
  • Organizational Leadership
  • Power and Influence for Positive Impact
  • Strategy Execution
  • Sustainable Business Strategy
  • Sustainable Investing
Subscribe to the Blog
RSS feed

How to Diversify Your Portfolio with Alternative Investments

Portfolio managers tracks investment performance
  • 28 Sep 2021
Catherine Cote Author Staff
tag
  • Alternative Investments
  • Finance

“Don’t put all your eggs in one basket” is a proverb that warns against investing all of your resources in a single source. If something were to happen to that basket, you’d lose all of your eggs. To mitigate that risk, it’s wise to spread out your assets. When applied to investing, this proverb directly speaks to the value of portfolio diversification.

Diversification is an investment technique that aims to increase returns and decrease overall risk by allocating capital across investment types and industries. Whether you’re an aspiring portfolio manager or an investor curious about how your portfolio is constructed, it’s crucial to understand diversification’s value in the investment world.


Free E-Book: A Manager's Guide to Finance & Accounting

Access your free e-book today.



Why Build a Diversified Portfolio?

Portfolio diversification is based on the concept of complementarity, which describes the degree to which two or more assets move in opposite directions in specific environments or scenarios.

By selecting complementary investments, you can decrease a portfolio’s risk profile, regardless of the risk profiles of the investments it comprises. For example, imagine you’re a portfolio manager and choose to invest in two stocks: Investment A and Investment B. Investment A is in a package delivery company, and Investment B is in a videoconferencing platform company. Even if both investments are highly risky, the fact that they’re not in closely related industries decreases the portfolio’s overall risk.

For instance, if there were a gas shortage and the company couldn’t deliver packages, Investment A’s stock price might drop. Yet, Investment B’s stock price could increase, as videoconferencing wouldn’t be negatively impacted by a gas shortage. The gas shortage might even cause some people to work from home and purchase the videoconferencing platform, which could result in Investment B’s performance being negatively correlated with Investment A. You’re effectively putting your “eggs” (capital) in separate “baskets” (investments) to spread out risk.

Related: What Is Sustainable Investing?

3 Strategies for Portfolio Diversification

There are three primary strategies for portfolio diversification, and a wise portfolio manager considers all three.

1. Individual Asset Diversification

The first strategy is to invest in an array of assets within an asset class. This can be as simple as buying the market index—the S&P 500 or the Russell 2000—to ensure a variety of high- and low-risk stocks across industries are equally represented in your portfolio. It can also mean consciously investing in industries that seem complementary to one another.

2. International Market Diversification

The second strategy is to look abroad. If your country’s market were to perform poorly, it’s useful to have some investments in international markets to mitigate risk and balance your portfolio. Keep in mind that other countries may have different rules, regulations, and processes for investing than your country does.

3. Asset Class Diversification

The third strategy is to diversify by investing across asset classes. These can include traditional investments—such as stocks, bonds, and cash—which operate in the public market, and alternative investments, which primarily operate in the private market and are largely unregulated.

Alternative investments can be a beneficial addition to portfolios due to their high level of complementarity with traditional investments. Here’s a closer look at what alternative investments are and how to use them to diversify portfolios.

What Are Alternative Investments?

Alternative investments are any investment besides stocks, bonds, and cash. Alternatives are relatively illiquid—meaning they can’t be easily converted into cash—and unregulated by the United States Securities and Exchange Commission (SEC).

Some of the most common types of alternative investments include:

  • Hedge funds, which pool the capital of many investors and invest it across various securities with the intention of managing risk to outperform the market’s rate of return.
  • Private equity, which is the investment of capital in private companies and encompasses venture capital, growth equity, and buyouts.
  • Real estate, which is the investment of capital in residential, commercial, or retail properties, either individually or through a real estate venture fund or investment trust.
  • Debt investing, in which capital is invested in the debt of a private company and can be distressed or private.
  • Commodities, in which capital is invested in natural resources, such as oil, agricultural products, or timber.
  • Collectibles, in which items such as rare wines, cars, and baseball cards are purchased with the intention of selling them when their value appreciates.
  • Structured products, which involve fixed-income markets and derivatives.

Alternative investments are a wise addition to portfolios because they tend to have a low correlation with traditional assets. This means that if the stock market is doing poorly, some of your alternative investments could perform well. Because these investments are separate from the public market, they present a great opportunity to diversify your portfolio.

Related: The Future of the Alternative Investments Industry

Factors to Consider for Diversified Portfolios

The alternative investment asset class contains a variety of asset types, each with unique characteristics. How do you know which are the best fit for your portfolio? Several factors can help you decide. Compare each alternative type to the traditional investment types in your portfolio to ensure diversification.

Time Horizon & Liquidity

Time horizon is the amount of time an investor can expect to hold a specific investment. Time horizons vary greatly, ranging from a few hours to a few decades. Liquidity is tied to time horizon; if an investment has a long time horizon, it’s considered illiquid until it reaches maturity.

Traditional investments (stocks, bonds, and cash) have no set time horizon and are fully liquid. Investors can cash in their investments whenever they decide to.

Alternative investments are relatively illiquid and have much longer time horizons. For some alternatives, time horizons are set at the signing of a contract; for instance, when someone becomes a limited partner at a private equity firm. Others are long simply because they’re difficult to sell or require time to accrue value. Here are a few examples:

  • Hedge funds: Because hedge funds invest across various asset classes, their time horizons can be extremely short (a few seconds) to moderately long (a few years).
  • Private equity: Private equity’s time horizons are typically around 10 years.
  • Real estate: Institutional investors hold real estate investments for nearly eight years on average. Individual real estate investors aren’t tied to a specific time horizon, but it can be difficult to move a real estate asset quickly, depending on how the market is performing.
  • Commodities and Collectibles: Commodities and collectibles have long, flexible time horizons, as they both require time to accrue value. You need to watch the trends in your asset’s specific market to know when it’s best to sell.

Building a portfolio that includes a variety of time horizons and liquidity provides both flexibility and security to its investors.

Markets & Industries

To diversify your portfolio, select investments from various industries and markets. When investing in private equity or debt investments, explore industry trends for the private companies you’re considering and select companies in industries with a high level of complementarity. When considering real estate investments, spread out your capital between several types of real estate or geographic locations.

Risks & Potential Threats

Spreading out risk is one of the key goals of diversification, and alternative investments provide varying levels of risk to consider. Returning to the concept of time horizons, investment options with longer time horizons are typically less risky because the market has time to correct itself should a downturn occur. If, however, your investment is a physical asset—such as a building, natural resource, or collectible—a longer time horizon means more time for the asset to be damaged, stolen, or lost, which adds additional risk.

Consider the types and levels of risk already present in your portfolio and choose investments that complement them.

Learn more about HBS Online's Alternative Investments course.

Using Alternative Investments to Diversify Portfolios

Alternative investments are key to a strong, diversified portfolio. Understanding the time horizons, liquidity, industry and market trends, and risk level of each type can help you select alternatives that mitigate your portfolio’s overall risk and increase returns.

Gaining a deeper understanding of each alternative investment type can serve you well as an aspiring portfolio manager. Consider taking an online course like Alternative Investments to build your knowledge base and sharpen your intuition for which investments are the best fit for a well-rounded, diversified portfolio.

Are you interested in learning how to build strong investment portfolios? Explore our five-week online course Alternative Investments and other finance and accounting courses.

About the Author

Catherine Cote is a marketing coordinator at Harvard Business School Online. Prior to joining HBS Online, she worked at an early-stage SaaS startup where she found her passion for writing content, and at a digital consulting agency, where she specialized in SEO. Catherine holds a B.A. from Holy Cross, where she studied psychology, education, and Mandarin Chinese. When not at work, you can find her hiking, performing or watching theatre, or hunting for the best burger in Boston.
 
All FAQs

Top FAQs

How are HBS Online courses delivered?

+–

We offer self-paced programs (with weekly deadlines) on the HBS Online course platform.

Our platform features short, highly produced videos of HBS faculty and guest business experts, interactive graphs and exercises, cold calls to keep you engaged, and opportunities to contribute to a vibrant online community.

Do I need to come to campus to participate in HBS Online programs?

+–

No, all of our programs are 100 percent online, and available to participants regardless of their location.

How do I enroll in a course?

+–

All programs require the completion of a brief application. The applications vary slightly from program to program, but all ask for some personal background information. You can apply for and enroll in programs here. If you are new to HBS Online, you will be required to set up an account before starting an application for the program of your choice.

Our easy online application is free, and no special documentation is required. All applicants must be at least 18 years of age, proficient in English, and committed to learning and engaging with fellow participants throughout the program.

After submitting your application, you should receive an email confirmation from HBS Online. If you do not receive this email, please check your junk email folders and double-check your account to make sure the application was successfully submitted.

Updates to your application and enrollment status will be shown on your Dashboard. We confirm enrollment eligibility within one week of your application.

Does Harvard Business School Online offer an online MBA?

+–

No, Harvard Business School Online offers business certificate programs.

What are my payment options?

+–

We accept payments via credit card, wire transfer, Western Union, and (when available) bank loan. Some candidates may qualify for scholarships or financial aid, which will be credited against the Program Fee once eligibility is determined. Please refer to the Payment & Financial Aid page for further information.

We also allow you to split your payment across 2 separate credit card transactions or send a payment link email to another person on your behalf. If splitting your payment into 2 transactions, a minimum payment of $350 is required for the first transaction.

In all cases, net Program Fees must be paid in full (in US Dollars) to complete registration.

What are the policies for refunds and deferrals?

+–

After enrolling in a program, you may request a withdrawal with refund (minus a $100 nonrefundable enrollment fee) up until 24 hours after the start of your program. Please review the Program Policies page for more details on refunds and deferrals. If your employer has contracted with HBS Online for participation in a program, or if you elect to enroll in the undergraduate credit option of the Credential of Readiness (CORe) program, note that policies for these options may differ.

 

Sign up for News & Announcements

Subject Areas

  • Business Essentials
  • Leadership & Management
  • Entrepreneurship & Innovation
  • Strategy
  • Finance & Accounting
  • Business & Society

Quick Links

  • FAQs
  • Contact Us
  • Request Info
  • Apply Now

About

  • About Us
  • Media Coverage
  • Founding Donors
  • Leadership Team
  • Careers @ HBS Online

Legal

  • Legal
  • Policies
Harvard Business School
Copyright © President & Fellows of Harvard College
  • Site Map
  • Trademark Notice
  • Digital Accessibility