Investing doesn’t just have to be about stocks and bonds. There are many investments that may be a good fit for your portfolio. While some alternative investments can enhance a portfolio, they should probably be a modest percentage of your overall financial plan.
Examples of alternative investments include real estate, managed futures, private equity, along with many others. Because the pattern of returns in these investment categories typically don’t correlate closely with those of stocks and bonds, their presence in a portfolio can complement returns, while potentially reducing the portfolio’s overall ups and downs.
But before you start investing in anything new, you need to reassess your portfolio, asset allocation and risk tolerance. If you’re not sure how your portfolio shapes up, find out. Take the time to review your portfolio with your financial consultant to discover the nature of your current investments and how well they’re working together.
Working with your financial consultant to assess your risk tolerance may be the most important step. Many investors who considered themselves aggressive growth investors just a few years ago are now learning they don’t have the same tolerance for taking risks. This could ultimately determine how you allocate your assets in order to reach your financial goals.
As you review your holdings and financial goals, you may be able to improve your diversification just by broadening your selection beyond the traditional range of investments. Let’s take a look at some of these:
Managed futures. A futures contract is an exchange-traded contract to buy or sell a fixed amount of some commodity for future delivery on a certain date. The commodity could be cattle, corn, coffee or some other physical commodity; or it could be a financial commodity, such as a currency. Few investors have the time or the experience to manage a diversified futures account on their own so, as an alternative, investors can buy managed futures funds. Commodity Trading Advisors trade futures in dozens of different markets in an attempt to generate returns that are not correlated with more traditional markets.
Keep in mind there are significant risks associated with managed futures and they are not suitable for all investors. You could lose all or a substantial amount of your investment. Risk of loss is due to the speculative and leveraged aspects of trading, fluctuating prices and the unpredictability of market direction. Exchange rules limiting price fluctuations and setting speculative position limits may also increase risk.
Master limited partnerships . An MLP is a publicly traded partnership, oriented towards the energy sector, which trades like a stock on a securities exchange. Individual investors buy ownership interests, or units, in the partnership through a stock exchange similar to purchasing shares of a stock in a company. MLPs are a particularly attractive investment because of their high dividend yields and ability to grow.
As always, these investments are not suitable for all investors as you could lose all or a substantial amount of your investment. Investing in an MLP involves risks that differ from investments in common stocks. Rising interest rates could adversely impact the financial performance of MLPs. Also, there are certain tax risks associated with investing in MLPs and conflicts of interest between common unit holders and the general partner, including those arising from incentive distribution payments.
Real estate investment trusts. A REIT is a company that owns and, in most cases, operates income-producing real estate such as apartments, shopping centers, offices and hotels. A REIT can be an efficient way for you to invest in commercial and residential real estate ventures. REITs combine many of the features of real estate and stock investing and offer diversification by investing in multiple properties.
REITs may be less liquid and contain a higher risk of loss of principal that other forms of publicly traded equity investments and may be more appropriate for individuals willing to assume a higher degree of risk for the opportunity of potentially greater returns.
As always, you should work with your financial consultant to evaluate whether any alternative investments are right for your specific situation.
By Shawn Mercer
Shawn Mercer is a financial consultant for A.G. Edwards & Sons Inc. in Milledgeville. He can be reached at (478) 452-0262 or 1-800-967-0262 and on the Web at www.agedwards.com/
Source: Union Recorder
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