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
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
that differ from traditional assets and strategies.
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.
they were once the exclusive domain of
and the very wealthy. Mutual fund
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
A: Medina: That depends on an investor's overall goals and risk
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.