The Middletown Press (Middletown, CT)
Is there a place for alternatives in your portfolio?
Historically, most alternative investments were out of reach for the ordinary investor. Buying into hedge funds or investing in timberland required deep pockets and status as an accredited investor.
With the advent of exchange-traded funds and alternative-based mutual funds, times have changed. Today it’s a simple matter to dedicate a portion of your investment portfolio to asset classes outside the conventional core trio of stocks, bonds and cash.
The type of market volatility we have experienced since the start of the coronavirus pandemic in March highlights the need to diversify your portfolio. You can achieve a high degree of diversity within the three core asset classes, for instance by increasing the percentage of cash or bonds. Another option is to change the mix within a class, e.g., transferring some funds from small-cap to large-cap mutual funds.
Alternative investments offer another way to diversify, because these asset classes may rise and fall in opposition to stock and bond markets. In other words, when the stock market falls, some so-called “alts” will rise in value, and vice versa. This “low correlation” may help limit losses and smooth out your investment results over time.
Popular alts include gold, silver, real estate and collectibles (art, wine). Other categories, generally limited to more sophisticated investors, include hedge funds, private equity, venture capital and managed futures. There are also opportunities to invest in energy (natural gas, oil) and agriculture (corn, wheat).
It’s important to remember that alternative investments should make up a relatively small percentage of your overall portfolio, perhaps 3 percent to 10 percent, as they can be more costly than traditional
A Certified Financial Planner can help you decide whether to invest in alternative asset classes, which assets to choose and what investment vehicles to use.
investments and also can be more volatile and carry more risk. On the other hand, they may enhance your overall portfolio.
If you are wondering what percentage of your portfolio you should invest in alternative funds, it depends on your time horizon, net worth and risk tolerance. For example, younger investors might consider a higher percentage than someone closer to retirement, given the higher costs and risks, since they have more time to make up any losses.
A Certified Financial Planner can help you decide whether to invest in alternative asset classes, which assets to choose and what investment vehicles to use. A financial adviser will look at these questions in view of your broader financial planning picture and your retirement planning goals.
Alternative investing is a complex field. For example, there are now more than 130 ETFs that invest in commodities such as precious metals, energy and agricultural goods.
There are four types of commodity ETFs: Equity ETFs invest in commodityrelated stocks; exchangetraded notes (ETNs) track securities indexes; physically backed funds hold commodities such as gold in storage; and futures-based funds trade in futures, forwards and swap contracts related to commodities. Some commodity ETFs utilize “laddered” strategies while others pursue “optimized” strategies. It takes a financial planning expert to sort through the bewildering array of alternative investing options available to the modern investor. Please keep in mind that diversification does not ensure protection in down markets. It is not a “silver bullet” despite the many pundits who speak to it.