Why Alternative Assets Make Sense

I had an interesting conversation this afternoon with a colleague that specializes in foreign exchange trading.  Now granted, he was trying to get me to move some client money to his firm, and felt that his approach is ideal for a portion of our portfolios.

Surprisingly, unlike a lot of financial planners and certainly contrary to many equity portfolio managers, I actually agree that, for a portion of client portfolios, what have traditionally been called “alternative assets” like real estate, commodities, foreign exchange, hedge funds and private equity, are an integral part of a well designed portfolio.  In fact, there are numerous studies over the years that have shown that, although they can be volatile in the short term, alternative assets, over the long term actually REDUCE portfolio volatility and in INCREASE overall return.  That’s right, you heard it right, portfolio volatility is reduced and overall return is improved.

Over periods of time, like the 1990’s traditional assets like stocks and bonds have outperformed “hard assets” like gold and oil.  Over other periods, the 1970’s for instance, the hard assets have outperformed.  With exposure to BOTH types of assets, your portfolio should perform better over time than a portfolio built around one or the other.

The moral of the story is, don’t be afraid of these other assets.  Although they’re not advertised on TV like some other asset classes, they can prove to be quite valuable to your long term growth prospects.