Alternative Investments – Do They Deserve a Place in Your Portfolio?
by Sidney J. Ruth, CPA/Financial Advisor

Your asset allocation decisions are critical for determining the overall success of your portfolio. According to prominent studies, over 90 percent of portfolio performance can be attributed to the allocation of the assets within the investment portfolio. Historically, asset allocation was primarily achieved through a mix of core asset classes. These asset classes commonly included; Large, Mid, and Small-Cap Equities of both growth and value styles, along with fixed income securities, such as bonds, with maturities ranging from one to 30 years. These core asset classes, along with a cash component, typically make up a well-diversified portfolio. While proper portfolio construction requires a good mix of core asset classes, investment opportunities may sometimes arise in areas that are used less frequently than the core investments. These areas are often referred to as “alternative” or “opportunistic” asset classes.

Why include alternative assets in a portfolio?
The rationale behind including alternative asset classes in a client’s portfolio is two-fold. On one hand, alternative asset classes can bring the characteristics of a portfolio’s total mix into greater alignment with prevailing market and economic environments. Secondly, and probably most critical, is the ability of alternative asset classes to improve portfolio diversification and potentially reduce volatility due to the low correlation that many alternative investments have in relation to the broader stock market.
What are some examples of alternative asset classes?
Examples of opportunistic or alternative asset classes include, but are not limited to:

• Real Estate
• Domestic Micro-Cap
• International Developed Country
• Small Cap Stocks
• Emerging Market Debt and Equities
• Commodities
• Precious Metals
• International Bonds
• Non-Dollar Cash Equivalents
• Long/Short Equities

Depending upon the nature of the alternative asset class, these investments can be made through either the direct purchase of securities or through closed-end funds, open-end funds, or exchange traded funds.

Although alternative asset classes are not appropriate for all investors, the inclusion of these investments can expand the number of asset classes within a portfolio and improve the risk/reward tradeoff. Regardless of whether these asset classes are included, regular reviews of your portfolio to ensure the continued proper allocation of your investments is critical. Call FIFS at 267-384-5300 today to evaluate the asset allocation of your portfolio to make sure it is in line with your goals.

FIFS Connection, Spring 2006, Vol.3, No. 2