Asset Allocation For Dummies®

Chapter 13. Walking to the Beat of a Different Drum: Opting for Alternative Investments

In This Chapter

• Getting to know common alternative investments

• Understanding how alternatives can improve your portfolio

• Deciding if you're ready for alternatives

Filling your portfolio with traditional asset classes — cash (and cash equivalents), fixed income (bonds and bond funds), and equities (stocks and stock funds) is a good start, but it isn't enough. To truly protect your portfolio from downside harm and enhance its long-term performance you need to broaden your portfolio's horizons.

In Chapter 3, we introduce the so-called alternative asset class — assets other than cash, bonds, and stocks. In this chapter, we take a closer look at three popular subclasses — real estate, commodities, and hedge funds — and explore their pros and cons. We also touch on some more esoteric alternatives such as art and collectibles, financial derivatives, structured notes, limited partnerships, and private equity.

We let you know why adding alternative asset classes — in the right proportions — can improve the performance and minimize the risk of your portfolio by tapping the power of poor correlation. (Check out Chapter 4 for all you need to know about correlation.)

Finally, we give you some guidelines to consider when deciding whether you're ready to take the plunge into alternative investments. Alternatives aren't for the timid. But those investors who take the time to understand them, how they behave, and how ...