Provided by Vanguard
Investors are naturally drawn to assets that sit outside the traditional portfolio core of shares and bonds.
The appeal is understandable. Assets like gold, cryptocurrencies and other alternative investments promise diversification, inflation protection, new sources of return, or a hedge against extreme market events.
But the question is not just whether these assets can deliver on their promise. It’s whether the risks they introduce justify a role in your clients’ portfolios.
Making sense of alternatives: Income-generating versus non-income generating assets
Alternative assets are often discussed as though they represent a single category.
In reality, the label covers a diverse collection of investments with very different characteristics, including:
- Private equity & credit
- Hedge funds
- Unlisted property
- Commodities
- Precious metals
- Cryptocurrencies
A helpful starting point when classifying these assets is to consider: is it an income-generating asset or not?
The value of traditional assets like shares and bonds is linked to their potential to generate cash for investors. In contrast, for alternative assets like gold and other commodities, their prices are driven by supply and demand – they don’t generate income, even if they may have an important role to play in the global economy. The same applies for crypto. Even if the underlying technology (e.g. blockchain and tokenisation) may be useful, the asset itself has no fundamental driver of value.
This distinction matters because it goes to the heart of how that asset will generate future wealth for your clients. Will they create wealth through productive income generation, or because you have conviction that the price of the asset will rise in the future?
Gold: A store of value, but not an income-generating asset
Gold has occupied a unique place in investing for centuries. It’s often viewed as a safe-haven asset, a hedge against inflation and a store of value during periods of uncertainty.
The challenge is that these benefits can be inconsistent. Historically, gold has experienced extended periods of underperformance and, because it lacks income generation, investors rely largely on future buyers paying a higher price.
For long-term investors, this makes gold fundamentally different from productive assets such as shares and bonds that generate earnings, dividends or interest.
Vanguard’s view is that is difficult to justify as a core strategic allocation given its lack of intrinsic cash flow and uncertain long-term return drivers even though at times it can play a role as a store of value.
Cryptocurrency: Exciting technology, but highly volatile
Few investments have captured investor attention like cryptocurrency. Bitcoin, Ethereum and other digital assets have produced extraordinary gains at various times while also experiencing severe drawdowns.
Cryptocurrencies derive their value through supply and demand, rather than underlying cash flows or economic fundamentals.
The result is an asset class with highly uncertain valuation anchors and significant volatility. Key risks include sharp price swings, liquidity concerns, custody risks, fraud, and evolving regulation.
For these reasons, Vanguard doesn’t offer its own cryptocurrency ETFs or mutual funds.
Some clients may still be interested in cryptocurrency. Where that’s the case, the key is to be clear about its role: it should be treated as a speculative satellite exposure, sized carefully, and kept separate from the diversified core designed to do the long-term wealth-building work.
Trading in cryptocurrency funds may involve significant risk and may not be suitable for all investors. If you’re considering cryptocurrencies or crypto-related funds, we encourage you to:
- Understand the product’s structure and underlying exposure.
- Assess risk tolerance and investment horizon.
- Consider how the product fits within your clients’ broader asset allocation.
- Review the fund or ETF’s prospectus and disclosures carefully.
Sizing alternative assets: Think in terms of your client’s risk budget
Assets like crypto are attractive because investors often think in terms of ‘what if?’
What if a turnaround in sentiment sparks another bull run in Bitcoin? What if a fiscal crisis causes the gold price to spike?
Fear of missing out (FOMO) is a behavioural bias that affects every investor. The best way to manage FOMO is to apply a risk lens.
Rather than focusing on how much of an asset to own in dollar terms, a more relevant question is: how much additional risk is your client willing to accept relative to a well‑diversified core?
The chart below shows why risk contribution—not dollar allocation— can be a more meaningful lens for sizing alternatives.
Based on Vanguard calculations, it shows how a fixed risk budget of approximately 2% relative to a global portfolio comprising 60% equities and 40% fixed income results in significantly different portfolio weights for each alternative asset, depending on its volatility.
In this framework, an investor could allocate about 11.5% to gold, 9.3% to silver, or 3.5% to Bitcoin while remaining within the 2% risk budget. The key takeaway is that even small allocations to volatile assets can quickly dominate portfolio risk, underscoring the need for clear allocation guardrails.
Even a small allocation to a volatile asset can carry big risk
Notes: The risk budget is based on a 2% contribution to total portfolio risk relative to a global 60% equity/40% fixed income portfolio. Gold, silver, and Bitcoin are spot price returns at month-end. Returns and volatility are calculated using nominal prices. Asset volatility is calculated as the annualized standard deviation of monthly returns over the stated sample period. These figures reflect standalone volatility and do not account for correlations with the 60/40 portfolio. The data sample is January 1994 through April 2026 for gold and silver, and January 2021 through April 2026 for Bitcoin. We limit the Bitcoin sample to recent years to acknowledge that volatility has decreased as Bitcoin has grown and matured; otherwise, its volatility would have been greater.
Sources: Vanguard calculations, based on data from Macrobond, Bloomberg, and the Federal Reserve Bank of St. Louis.
Sizing noncore exposures by their contribution to portfolio risk, rather than by dollars invested, helps impose discipline and establish guardrails.
It also helps ensure that the positions remain proportionate to conviction rather than reshape the portfolio’s risk profile.
Keep the core at the centre
The greatest value from alternatives comes not from predicting when they will shine, but being explicit about their role, honest about their limitations, and disciplined about the risks they introduce.
For long-term investors, the evidence continues to support a portfolio built around productive assets that generate cash flow and compound wealth over time. Alternatives may have a role to play as satellite exposures, so long as that role is clearly defined and carefully managed.
Vanguard’s recent Portfolio Trends report, which examined over 100 adviser portfolios, found that alternative allocations were typically small, generally serving as satellite positions rather than core holdings.
Alternatives as an asset class tended to be more expensive, more complex, and overwhelmingly dependent on active manager selection.
The challenge is not simply whether alternatives diversify equities and bonds, but whether they present satisfactory incremental risk adjusted opportunities (i.e., after accounting for fees, liquidity constraints, complexity and risk).
In portfolio construction, the core should continue to do the heavy lifting. The world beyond the core may be fascinating, but it’s rarely where long-term investment success is built.
Important information: Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer and the Operator of Vanguard Personal Investor and Vanguard Super Pty Ltd (ABN 73 643 614 386 / AFS Licence 526270) (the Trustee) is the trustee of Vanguard Super (ABN 27923449966) and the issuer of Vanguard Super products.
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