Royalty Review: Diversify with Music

Aug 28, 2014

Even with stocks at all time-highs, investors realize the most effective way of reducing risk in a portfolio is through diversification. But adding small-cap, mid-cap or international stocks to an equity portfolio doesn't do much. Because all stocks are highly correlated, when the market drops, they all drop. Correlation measures how closely two assets relate. Most stocks are highly correlated and increasingly, so are bonds and commodities.

In an article featured in InvestorPlace, author Charles Sizemore tells us that “commodities […] having a low correlation to the stock market […] is patently false”. In his article, Mr. Sizemore references an academic study from Princeton University that demonstrates commodities and commodity stocks are becoming more highly correlated, both to each other and to other asset classes. Shortly put, gold, REITS and oil aren’t the hedge they used to be. Diversification is one of the central benefits of music royalty investing. Because royalties are not correlated with stocks, bonds or commodities, they can lower a portfolio's volatility and can even enhance returns.

Invest in music royalties as alternative investment solutions

Source: Royalty Exchange, Inc.

For example, Timothy Clayton royalties on songs by Justin Timberlake, David Guetta and Dr. Dre recently sold on Royalty Exchange, Inc. for an initial yield of 18.50%, based on the preceding 12 months income. Use of the songs, not stock prices, interest rates or the economy determines the future financial performance of the royalties. In fact, periods of economic turmoil are often when music royalties are most attractive: people don't stop listening to or buying music just because the Dow drops a few hundred points.

When it comes to diversifying a portfolio, adding more equities doesn't actually offer much diversity. From a risk-management perspective, it's like dumping pepper into an already spicy bowl of chili. Music royalties, because they offer the potential of steady returns uncorrelated with financial markets and the economy, can provide the true diversification investors seek.

For more information on royalty investing check out these other Royalty Review articles:

"Valuing Music Royalties"

“How to think of Royalties”

“A Royal(ty) Return”

“When Music Appears in a Film”