You can build your investment portfolio
without looking further than stocks, bonds, and cash.
But there's a range of other investment opportunities that
can help you meet your financial goals. Some of them, like
buying real estate, may have the added advantage of providing
you with a place to live. And increasing numbers of investors
are augmenting their portfolios with alternative investments,
such as real
estate investment trusts (REITs), inflation-protected
securities, and hard assets.
One of the benefits of adding alternative investments to
your portfolio is that they typically have low correlations
with more traditional investments. This means that their
values usually don't move in tandem with more traditional
investments — reducing the volatility of your portfolio.
For example, hard assets, such as timber, precious metals,
and energy, tend to have low correlations with both stocks
and fixed-income securities. So hard assets may gain value
when stocks and bonds hold steady or decrease in value,
and vice versa.
Some alternative investments are well suited to conservative
or moderate investors, while others are more appropriate
for investors who can tolerate a fair amount of risk. It's
important to understand the unique characteristics of the
investment you're considering and how that investment fits
in with your overall allocation strategy.
Professor
Roger Ibbotson, Yale University, chairman and founder
of Ibbotson Associates
See how
adding high-risk assets to a well diversified portfolio
may actually lower your investment risk.
Though it may
seem counter-intuitive, the addition of a high-risk asset
to your portfolio may reduce your total portfolio risk
if the high-risk asset has a low correlation with your
other investment assets. In this way, you can lower your
portfolio risk while at the same time increasing your
potential return.
Professor
Roger Ibbotson, Yale University, chairman and founder
of Ibbotson Associates 