As with most investments, that question is best answered by determining if an Alternative Investment matches your goals, time frame and risk profile.

First, let's review what are Alternative Investments, why they might be used and the advantages as well as potential risks involved.

Typically Alternative Investments are identified as those which are not traditional equity or fixed income instruments such as company stock or bonds. Alternatives can include real estate or real estate based investments such as Real Estate Investment Trusts (REITs). Other investments include commodities, currency contracts, precious metals and a host of other new products such as Collateralized Debt Obligations (CDOs). As their use becomes more common, the "Alternatives" become mainstream investments and newer instruments take their place.

Why would you consider using an alternative investment? Many alternatives do not have the same return and risk profiles as traditional investments. If the proper mix of investments is selected for a portfolio the result can be a higher overall return with a lower total risk. Alternative investments may be more effective in achieving this diversification than using traditional asset classes.

Some alternatives, such as precious metals, can be effective inflation hedges. Other can hedge potential losses of investments that are based in a foreign country or currency. The overall theme is to reduce your portfolio's exposure to various risks by using different investment vehicles.

There are some potential drawbacks to consider. If the investment is not widely traded, the transaction costs may be higher. They also may not be as liquid as traditional investments so you would not want to use them if there was a possibility that your investment might have to be redeemed quickly. For items such as artwork or precious metals there can be significant costs in storing, assessing value and insurance. Several mutual funds and Exchange Traded Funds (ETFs) have been designed to act as proxies for a specific investment class. That is you might invest in an ETF that invests in gold mining companies as a proxy for the gold market. The ETF avoids some of the drawbacks of holding the base investment while retaining some of the expected return and risk characteristics.

By themselves, many alternative investments are more risky than traditional investments. They should be used to augment the core investments in your portfolio, not be the drivers of overall performance. I design portfolio allocations to achieve specific goals that meet your growth goals while considering your time horizon and risk tolerance. Once the core investments are identified, alternative investments can be selected with characteristics that will complement the core investments. Since the intent is to lower the overall risk, typically only small positions are needed to achieve the results desired.

If you are interested in learning more about alternative investments, portfolio design or how using alternative investments might improve the performance of your investments please contact me so we can look at your specific situation.