What exactly are Alternative Investments? For our purposes, they include any investable asset class that does not closely mimic the movement of either the stock or the bond markets. Over the course of the last 5 years, alternative asset classes have become more correlated to stocks and bonds. Among the reasons for this are the explosion in the amount of money invested in hedge funds, which rely heavily on alternative investments for their outsized returns. But in spite of this convergence, we still recommend that a portion of your assets be invested in this space. Diversification may not work as well as it once did, but it still works.
Below is a list of the largest and most liquid ETFs that represent various alternative asset classes.
Getting back to the question of whether or not you should use these alternative investments in your portfolio, it depends on a couple of things. First, you need to have enough capital to make it worth the time and effort. Small accounts (less than $250K) will probably not benefit much because there is an added layer of costs involved with alternative investments. Commissions, fees, and trading costs are all higher than they are for stocks and bonds, because the markets are less efficient.
Secondly, it takes more time to track and manage a portfolio that contains alternatives. This should not discourage investors who have the available time to spend, and are interested in doing the research that’s required to make an informed decision about alternatives. But for the investor who is too busy, or who finds the whole process of maintaining a portfolio tedious, alternatives are not recommended.
The benefits are significant for those who fit the profile. More asset classes means less volatility. Less volatility means lower portfolio risk. And lower portfolio risk means better long-term risk-adjusted returns. If you are interested in learning more about alternatives, and whether they could be a good fit for your situation, drop me a line using the Contact Us form, and I’ll get back to you promptly.
If you would prefer to use email, send it to info@zeninvestor.org
Good article on the topic of media print, we all should be aware of media as an enormous source of misleading data.