How alternative investments may fit your portfolio

The state of the markets in 2022, where both stocks and bonds experienced declines in the first half of the year, may have you thinking about other investing options.

If you’re wondering how to further diversify your portfolio alternative investments are one option to consider. They include real estate, commodities, hedge funds, private equity and private debt, and venture capital.

Before you dive in, here’s what you should know about these nonconventional assets. You should also be sure to seek the advice of a trusted financial advisor who can help you evaluate your risk tolerance, time horizon and whether alternatives could have a suitable place in your portfolio.

A different kind of investing

Alternatives, as the name implies, are not mainstream investments, and if included in a portfolio, should only make up a small portion of it (no more than 15% to 20% is one rule of thumb, but the appropriate amount may vary).

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Commodities can include natural resources such as crude oil, wheat, corn, and coffee. Trading typically occurs on the futures market, which means the investments are more complex than typical securities. Real estate includes publicly-traded real estate investment trusts (REITs), which trade on the stock market, or private REITs, which have different investment requirements. Investors may also invest directly in land or property.

Private equity, private debt, hedge funds, and venture capital are available to individual investors through professionally-managed funds. These segments of the market were off limits to all but the wealthiest investors and institutions until recently. Such assets are more accessible today than they were in the past and, like other forms of alternatives, can play a role in your portfolio.

 Potential benefits of alternatives

The primary benefit of including alternatives in your asset mix is portfolio diversification. An effectively diversified portfolio can help you generate more consistent investment performance over time. Historically some types of alternatives have shown the potential to hedge against the negative impact of weaker performance periods in stock and bond markets.

Further, alternatives may be a hedge against higher inflation. These types of assets have the potential to keep closer pace with rising living costs.

Potential challenges 

Alternative investments are a long-term portfolio position. You need to be certain that you won’t need to liquidate assets early to access money committed to alternatives.

In addition, some alternatives aren’t subject to the same level of regulatory oversight as other securities. Be certain you fully understand the nature of the investment you select and the terms of the offering.

It may not be as easy to determine whether a specific investment is truly appropriate without significant research or professional guidance. To that end, talk to your advisor about how alternatives can most effectively be incorporated, and which types are a good fit, for your own portfolio.

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