Should Alternative Assets Be Part of Your Asset Allocation?

Welcome to My Personal Finance Journey! If you are new here, please read the “About” or “First-Time Visitor” pages to find out more about us. If you would like to receive free updates on articles like this by email, then sign up here or you can subscribe to the RSS feed. Also, check us out on Twitter or Facebook. Thanks for visiting! Keep on learning!

Click here to enter my free $51.95 giveaway for a chance to win 5% of My Personal Finance Journey blog income and give another 5% to a charity of your choosing! Deadline to enter is January 31st, 2013.

The following is a guest post by Mario Favela from Gator Finance. Enjoy! 

Alternative assets are any investment excluding stocks, bonds, or cash. Collectibles, real estate, precious metals, art, and wine are all included in this definition. Other examples are commodities, hedge funds, leveraged funds, and Master Limited Partnerships (MLPs).

In this post, we will focus on some of the more mainstream and accessible alternative assets.

Should You Own Alternatives?

They should be a part of your overall asset allocation strategy. They typically have a low correlation to stocks and bonds, which means they do not move in the same direction. In the past, illiquidity and high cost kept them out of reach for most retail investors. Today, Exchange Traded Funds (ETFs) and Exchange Traded Notes (ETNs) allow smaller investors to more easily buy and sell alternatives. Alternative ETFs do have higher expense ratios than the average stock or bond index ETF. That cost is minimal when you consider the amount of diversification these products offer.

Tax Implications

Investors should be aware of possible unforeseen tax implications. It is better to hold some alternatives in tax-deferred accounts like Individual Retirement Accounts (IRAs). Tax laws constantly change which can make it difficult for investors to be sure exactly how the IRS will treat income and gains from year to year. Each individual situation is different.  Please consult with your tax advisor before purchasing alternative investments.

How Much Should You Allocate?

Let us say you have decided to include alternative investments in your portfolio. How much should you allocate? Remember that they are risky. Best not to have more than 15% of your total portfolio invested in them. For example, if you have $100,000 to invest, you would put no more than $15,000 into alternatives. You might invest $5,000 in REITs, $7,000 in commodities, and $3,000 into a hedge fund ETF.

List Of Alternative Assets

Here are some of the more common and easily accessible alternative assets available. This is just a short list to get you started, keep in mind that there are many other alternative investments available.

Silver And Gold

Physical metal backs the shares of both the COMEX Gold Trust – IAU and the Silver Trust – SLV ETFs. The IRS taxes them at ordinary income tax rates, due to their structure as grantor trusts. Investors also have the option to buy and store gold and silver bullion, coins, or jewelry. This can be more expensive due to storage costs.

Diversified Commodity

DB Commodity Index Tracking Fund – DBC tracks 14 physical commodities including, oil, gas, gold, sugar, corn, soybeans, zinc, and copper. This is a futures based fund, although some commodity ETFs use swaps and options.

Master Limited Partnerships (MLPs)

MLPs are publicly traded limited partnerships that trade on exchanges like stocks. They derive at least 90% of income from natural resources, commodities, or real estate. The iPath S&P MLP ETN – IMLP tracks energy MLPs. There can be tax benefits for holding limited partnership, and they are liquid and trade like stock.

Real Estate Investment Trusts (REITs)

REITs earn most income through collection of rent. REIT ETF – VNQ offers exposure to North American real estate. SPDR DJ Wilshire Intl Real Estate – RWX is composed of real estate holdings outside the United States.

Merger And Acquisitions (M&A)

The IQ Merger Arbitrage ETF – MNA tracks a merger index and invests passively in companies that are merger and acquisition targets. Some short exposure, meaning the fund can profit during down markets.  

Hedge Funds

Hedge Replication ETF – HDG tracks the performance of hedge funds. This is a fund of funds and a good way for investors to add hedge exposure to their portfolios. Hedge fund managers operate under less regulatory restriction, and in theory, make money in both up and down markets.

Leveraged ETFs

Leveraged ETFs magnify market returns. For example, Ultra Short S&P500 – SDS makes money when the stock market goes down. Ultra S&P500 – SSO makes double the amount of the S&P 500 when markets are up. Better to hold leveraged ETFs in tax-deferred accounts.

Conclusions and Personal Applications

Holdings on this list can add value, but are not always appropriate for every investor. Keep it simple and make sure you understand what you are purchasing before you buy. For example, I do not have any of the alternatives listed above in my investment accounts. I keep most of my liquid assets in equity and cash. I do own physical real estate as well as gold and silver stored in a safe deposit box. These three simple alternatives are easy to understand and research, and they diversify my overall portfolio. Customize and adjust your alternative asset mix according to your own personal needs.
Alternative assets should be an important part of your portfolio. You can lessen their inherent risk by using basic asset allocation rules. Make them a small part of your overall asset mix. Trim positions if they begin to skew your percentages. Used properly, alternative assets can diversify your investments, help your returns, and improve your chances of reaching your retirement goals.

How about you all? Do you incorporate alternative assets in to your investing strategy/asset allocation? Why or why not?

If you do, which categories of these alternative assets do you own?

Share your experiences by commenting below!

    ***Photo courtesy of


    1. studentdebtsurvivor says:

      I don't know a lot about alternative assets, so I appreciate the explanation. Right now we're focused on saving money to buy an investment/rental property, that's as “alternative” as we can be right now 😉
      My recent post Survivor’s Standouts 1/20/13-Back to School Edition

      • Sounds like a good goal! What type of property – condo/duplex/single home?
        My recent post You Don't Know What You Don't Know – A First-Hand Account of the State of Personal Finance Education

    Speak Your Mind


    CommentLuv badge