Retirement Portfolios: Adding Crucial Alternatives

We've all heard about the wisdom of not putting all your eggs in one basket. In traditional investment theory this means holding a range of different kinds of assets in your retirement portfolio. (For related reading, see article: Bear-Proof Your Retirement Portfolio.)

If you hold fewer securities, there is a greater risk that a decline in one of them could adversely affect your whole portfolio. By diversifying your holdings into assets that may perform independently of each other in different markets, you spread out the risk, or volatility, of the overall portfolio.

Investing in assets with different cycles of performance is aimed at preventing "positive correlation," or the risk that your assets move in tandem and perform similarly. Traditionally, asset classes such as stocks and bonds would be negatively correlated, meaning they generally have moved in opposite directions and provided returns accordingly.

But following the 2008 financial crisis and the subsequent low-interest-rate environment, asset classes that used to provide diversification have been exposed to many of the same factors that push them in similar directions. (See article: The 2007-08 Financial Crisis in Review.)

But you can still diversify by considering what's called "alternative" investing, which involves a wider range of strategies which were, until recently, mainly available to institutions and very wealthy investors.

Alternative investing is based on the premise that it's possible to buy a basket of investments with different risks that may perform independently of each other. These could include assets such as commodities, or involve strategies that aim to take advantage of differing economic outlooks in various parts of the world.

This kind of diversification seeks to provide alternative sources of capital growth and income with low correlations to public markets. Gaining access to such liquid alternatives is now possible for the average investor through mutual funds and exchange traded funds.

This gives more investors the opportunity to move away from the traditional stock/bond makeup of the typical retirement portfolio.

Consult your financial advisor about alternative investing.

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