Collecting my thoughts on Alternative investments:
An alternative investment is an investment that is not one of the three traditional asset types (stocks, bonds and cash). This may include anything from a hedge fund or a derivative to gold, art and antiques.
A well-diversified portfolio of stocks, mutual funds and bonds is still not diversified enough during a market crash. This is why it is necessary to invest in other asset classes which are negatively correlated or have a very low correlation to the usual assets.
Becuase of certain characteristics of alternative investments such as low or no regulation, high transaction costs and unavailability of historical data, it is very difficult for small investors to invest in alternative investments such as hedge funds, Real estate and collectibles.
For those who can’t afford these following options are available:
- Commodities
- REIT
- Hedge fund strategies - Choose MFs that replicate HF strategies
Some additional thoughts on investing:
- Diversify internationally - 30-60%, higher diversification is not better necessarily. For example if a portfolio is diversified 50% but most of that is concentrated in Europe, it is not exactly better than a portfolio with 30% diversification spread across the continents or weighted based on economic activity.
- Choose low expense ratio, tax efficient index funds (tax efficiency depends on your country of living, citizenship, etc)
- Overweight on small companies, value and low beta stocks
