We have all heard our fair share of alternative fuels with the price of gas nowadays. In the investment world with the Dow flirting with 8200, the buzz word that is gaining momentum is Alternative Investments. The buzz has turned more into reality with investors looking for new areas to diversify their portfolios. But what exactly does it mean to purchase alternative investments?
What is an Alternative Investment?
The quick and easy definition of an alternative investment is one that is an investment other than the traditional stock, bond, money market that you would typically investment into. Okay, but where does that get us? To dig a little deeper, an alternative investment can include any of the following:
- commodities (managed futures)
- hedge funds
- financial derivatives (currencies)
- real estate
- private equity
- venture capital.
That is a very broad stroke of the different categories, but as you can see; each category carries its own unique level of risk.
Why consider alternative investments?
The easy answer is to diversify, diversify, diversify. In theory, this type of investment is supposed to have a low correlation with the market. Meaning that if the market goes down, this investment will not necessarily go in the same direction. What most investors need to realize is that a low correlation does not equal low volatility. Typically, you may see more fluctuations within the alternative investment realm than you would the regular investment world.
Are Alternative Investment Right For Boomers?
One could make the argument that alternative investments could find their place in any portfolio for the right percentage mix. Alternative investments need to be just that: an alternative. For boomers, that have trouble riding the day to day fluctuations, this may not be a suitable investment. As with any investment, you need to recognize your goals and suitability to see if this may be a strategy for you.
How Much Should You Have?
Most financial planners will suggest to have at least 5%-10% in some form of alternative investments. With the collapse of the financial markets in the past year, one could argue that you need more alternatives than the 10%. Have you invested in alternative investments? If so, share your story……