Is your portfolio filled with dust and cobwebs like a home ready for spring cleaning? Diversifying your portfolio is just like spring cleaning except that you can use alternative investment strategies to “clean” out your portfolio instead of carpet cleaners and new paint.
Diversification and Investment Choices
The U.S. Securities Exchange Commission calls diversifying your portfolio “asset allocation“. Treasury bonds, stocks, stock mutual funds, traditional bonds and CDs are considered primary asset categories that, historically, do not move up and down simultaneously, The SEC, as well as those experienced in alternative investment strategies, recommend investing in other assets that do rise and lower under various market conditions. As a result of diversification, you remain protected against substantial losses while enhancing the potential for desirable investment returns.
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Financial experts firmly believe that diversifying your portfolio using alternative investment strategies is the most meaningful decision you will make regarding your investments. When you get ready to “spring clean” your portfolio, consider doing the following:
- Review each investment to determine whether they match your investment goals.
- Sell investments taking up room in overweighed categories and purchase investments in underweighted categories with the proceeds.
- Buy new investments to pad underweighted categories.
- Continuously contributing to your portfolio means your portfolio is unbalanced. Change the way you contribute by placing more investments in underweighted categories until you regain that balance.
Exactly how much you invest using traditional asset classes depends on risk tolerance and your age. For example, people under 50 who are not troubled by market fluctuations and do not truly need money for another 10 or 15 years may be comfortable with having most of their portfolio composed of stocks and small portions of other asset classes. Alternately, investors close to retiring with low or moderate risk tolerance may find that having a portfolio comprised of stocks, bonds, and a small amount of each remaining asset class is more suited to their needs.
Diversifying with Alternative Investments
Alternative investment strategies include commodities (oil, silver or gold), hedge funds (includes program trading, derivatives, leverage and arbitrage), Forex and private equity (venture capital, mezzanine financing, managed/leveraged buyouts).
To get the most return on investment for your alternative investments, investors should have a firm grasp of what the above alternative investments represent and how they can provide the long-term benefits of diversification to a portfolio.
Futures investments also offer great diversification possibilities, capable of minimizing unwanted risk while allowing you to liquidate contracts easily because of the high level of activity in futures markets. Futures also double as hedge funds or for speculating on price movements of underlying assets. In addition, futures markets have low margin requirements, 24-hour trading, and no minimum trading requirement ($25,000 is the requirement when you are trading in equities).
Alternate investment strategies will generally provide you with favorable returns, controlled volatility and correlation proportionate to traditional investments. However, they sometimes pose complex issues regarding risk management because they include a variety of investment styles, from commodity trading to hedge funds to private equity.
Be Ready to Take a Risk
With risk comes reward. One of the big benefits of diversifying is the return can be much higher than most other investments. Which is why having different kinds of investments, like alternative investments, can result in greater returns than expected.
Change up your investments this spring and give yourself permission to take a little risk, for a lot of return.
Max D. – Max is a technical writer who regularly contributes financial topics to Farnsfield Research and other investing blogs. Max spends his time running multiple companies in the financial sector. This allows him to have a constant finger on the pulse of the industry.