Tired of Stocks And Bonds - What Percentage of Your Portfolio Should be in Alternative Investments

There was a point not too long ago that investing was relatively simple. Investors had two options: they could invest in stocks if they had a tolerance for risk, or they could go with bonds if they were willing to wait for the returns. Things have changed; if you want to invest your money, you have a range of different investment types that do not fall into either the bond or stock category. Some combine the respective benefits of stocks and bonds while others are completely different.  Below are some of the more popular alternative investments along with the suggested role they should play in your portfolio. 

Commodities
The point of alternative investments is diversification. You want your alternatives to not be tied to the stock market; that is what commodities offer. They are often seen as a way to maintain value when the US dollar declines. While at times there have been correlations between stocks and commodities, they are usually independent; that independence allows commodities to provide true diversification. However, commodities are notoriously volatile investments; they can go up and down in response to many different forces including supply/demand and the weather. To see the best returns, you should focus on specific trends like the demand for metals in China. You should definitely view your commodities investment as a long-term one. If you are new to commodities, it is best to start out low, with anywhere between three and 15 percent of your portfolio depending on your comfort level.

Foreign Currencies
Currencies move up and down constantly and their movement usually bears no relation to stocks and bonds, this makes them useful for hedging against your traditional investments. Even though trading currency is vastly different from trading stocks, investing in a foreign currency could be considered similar to investing in a nation’s stock. In other words, you make money if the nation experiences growth and prosperity. On the other hand, if the nation is failing economically, your returns may not be very good. If foreign currencies are going to be your sole alternative investment, it is widely recommended that it take up between 10 and 20 percent of your portfolio.

Gold
This precious metal is well known as a hedge against a weak dollar and inflation; its price is largely unaffected by stocks and bonds. While some believe that only a small portion of a portfolio should be in gold, others believe that it should make up a much larger percentage.  The percentage you invest in gold depends on your savings and your goals. Five percent of your portfolio is considered reasonable as it affords you some protection from risk.

Hedge Funds
Hedge funds are often considered to be good alternative investments because they are professionally managed, have lower minimum investments and their assets are diversified. They have been known to do well even as traditional markets are doing poorly. How much you should have invested depends on your age and your savings, but most recommendations are between the 12 and 20 percent mark. 

With alternative investments (as with most things), the key is moderation. They can be useful as a small part of your portfolio and help to limit your risk, but it is important to avoid going overboard. Before any kind of investment, you should make sure that you have sufficient liquid assets to serve as an emergency fund. Having cash on hand can also enable you to add to your portfolio should buying opportunities arise.

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