Vanguard warns investors against overstating diversification benefits of alternatives
Asset manager says gold and Bitcoin can quickly dominate portfolio risk despite small allocations, urging investors to focus on risk budgeting rather than headline returns.
Vanguard has warned investors against overestimating the diversification benefits of alternative assets such as gold and Bitcoin, arguing that portfolio discipline and risk budgeting matter more than headline returns.
In a new research note, “Alternatives in a portfolio: Think role, risk, and realism,” Vanguard said many investors misunderstand how volatile alternative assets can reshape portfolio risk even at relatively small allocations.
“Even small allocations to volatile assets can quickly dominate portfolio risk,” wrote Roger Aliaga-Díaz, Vanguard’s global head of portfolio construction, and John Ameriks, head of quantitative and strategic equity.
The report comes after gold prices surged to record highs earlier this year before retreating sharply amid heightened volatility. Vanguard said the episode highlighted the need for investors to define the role of alternatives more clearly within long-term portfolios rather than treating them as guaranteed hedges.
The asset manager argued that alternatives including gold, silver, commodities and cryptocurrencies differ fundamentally from equities and bonds because they “do not generate income or cash flows.”
Instead of focusing on dollar allocations, Vanguard recommends sizing alternative exposures according to their contribution to overall portfolio risk. Using a model based on a traditional 60/40 portfolio, the firm estimated that a 2% incremental risk budget could support allocations of roughly 11.5% to gold, 9.3% to silver, but only 3.5% to Bitcoin because of the cryptocurrency’s higher volatility.
“Treating gold, or any alternative, as dependable portfolio insurance embeds an expectation that is inconsistent with how diversification actually works” the authors said. You can read the full report here: https://corporate.vanguard.com/content/corporatesite/us/en/corp/vemo/alternatives-in-portfolio-role-risk-realism.html
