March 7, 2013 § Leave a comment
Life is full of changes. Investing undergoes changes, too. And some of these changes may increase your personal investment options. Let’s examine alternative investments.
First, what are traditional investments? Traditional investment vehicles are stocks, bonds or cash. Traditional investments are important to any portfolio. But economic conditions sometimes bring to light additional ways to manage investment risk.
So, what are alternative investments? Commodities, such as gold, managed futures, commercial or foreclosed real estate, equipment leasing, foreign currencies, oil and gas are all alternative investments. Typically alternative investments have been available to only ‘qualified investors’ or high net worth individuals. Alternative investments have become increasingly popular because of their ‘correlation’ with other asset classes some mutual funds are including alternatives in their funds.
Why do people use alternative investments? As I mentioned above, alternative investments are popular because they have a ‘low correlation’ to traditional investments. A low correlation means that each investment type reacts differently in various economic conditions. In a time of inflation, stocks and bonds behave differently than one another. And alternative investments behave differently than both stocks and bonds. Alternative investments behave uniquely to conditions such as supply and demand, growth, with or without inflation, and recessionary periods in an economy.
Here’s an example. In one economic period, perhaps a time of inflationary growth, stocks might be flat, while bonds do poorly. In that same period alternative investments might go up. Perhaps including them into your portfolio would add to your present diversification. You need to ask your advisor if alternative investments are suitable for you. Though ultimately, you need to have some familiarity about these terms even when you work with a professional because it’s YOUR money. (CR 9073)