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Alternatives give you more flexibility and opportunity
One thing we know for sure, financial markets tend to be boom and bust. Investors who diversify their portfolio with alternative investments can reduce their exposure to the ups-and-downs while giving their portfolios more growth potential.
Protection against market volatility
Investors learned in market downturns in 2000 and 2008 that a mix of stocks and bonds is often not enough to protect a retirement savings from extreme losses – especially when markets and asset classes around the globe move in sync. Because alternative assets are often not readily tradable on exchanges, their values are more likely to change at different times and to different degrees than conventional investments, helping to stabilize your portfolio.
An opportunity for enhanced returns
If you do your homework, buy at the right value at a good time and have a little luck on your side, alternative investments have the potential to deliver compelling returns over time.
For evidence, look at the professional investors who manage university endowments. They're generally considered some of the most progressive (and successful) investors in the world and have a long history of investing large amounts in alternative assets. In 2012, the average university endowment invested 54% of its portfolio in alternative strategies. Individual investors, by contrast, invest on average just 13% in alternative assets.
Source: 2012 National Association of College and University Business Officers Commonfund Study of Endowments. (N=831). “Alternative” includes private equity, venture capital, market-based alternative strategies, private equity real estate, energy and natural resources commodities, and distressed debt.
Morningstar, Alternative Investments Observer, Q213 reports that most investor portfolios range from 6% to 20% in alternatives (expresses as an average here).