There was a time when rule-of-thumb investing called for investors to divide their portfolios between large-cap stocks and high-quality bonds. Those core components are still important, but today's investors have a lot more to choose from. Recently we spoke with Steve Medina about alternative asset classes and alternative strategies.

Q: What are alternative investments?
A: Medina: Alternatives is a term that applies to any investment beyond mainstream stocks and high-quality bonds and funds that invest in them. It could be a real estate investment trust, or REIT, which provides exposure to different types of real estate in a liquid format. Or it might be emerging-market debt, which offers exposure to economies that may be growing faster than the United States' and to currencies that may be moving in different directions from the U.S. dollar. Commodities, such as oil and gold, are one of the most familiar categories of alternative investments. Or, it could be an alternative strategy, which means the manager has access to a wider range of tools than simply to buy securities in an effort to generate a positive return.

Q: How can alternative investments enhance an investor's portfolio?
A: Medina: Alternatives can help an investor enhance return or reduce risk. That's especially important to investors who have suffered through two bear markets during the past decade.

Q: How can alternative investments reduce risk?
A: Medina: They introduce either assets or strategies that move in cycles that differ from traditional assets and strategies. For example, during portions of the last two major bear markets, some alternative investments, such as gold and oil, rose.

Q: Are alternative assets and strategies new?
A: Medina: No, most have been around for a very long time. However, they were once the exclusive domain of institutions and the very wealthy. Mutual fund companies recognized how powerful these strategies could be and have made them available to individual investors. In fact, mutual funds can deliver alternative investments with lower costs and greater transparency.

Q: How much should an investor allocate to alternative investments?
A: Medina: That depends on an investor's overall goals and risk tolerance. These are not "one size fits all" investments. The amount of exposure to alternatives and the types of alternatives an investor might utilize varies based on the overall goal of his or her portfolio. It is still important to work with a knowledgeable financial professional who can help an investor understand the different types of alternatives and set expectations for how they may perform.

Asset allocation and diversification does not ensure a profit or protect against loss. Please note that asset allocation may not be appropriate for all investors; please consult your financial adviser for more information.