We believe the considerations to keep in mind when incorporating alternatives into an investment strategy are:
By definition, alternative investments use a nontraditional approach to investing. Therefore, it is prudent to take a conservative approach, opting for those strategies with a proven track record and stable investment team and process. With new offerings being offered regularly in this fast-growing space, it is wise to exercise caution, having a bias toward offerings with demonstrated success.
Generally allocating 15-25% of a portfolio to alternative investments is most appropriate, although the allocation can be higher in unique situations. This is a large enough allocation to be impactful in terms of enhancing returns or helping to reduce risk, without being so large that it dominates the overall portfolio. Typically alternatives can be funded proportionately from the equity and fixed income portions of an investment portfolio.
There can be circumstances in which an investor has a concentrated position in a single stock and is unwilling or unable to sell in order to diversify the portfolio due to, for example, sizable tax consequences associated with selling a security with a low cost basis or restrictions from selling based on his or her role at a public company. In these cases, using alternative investments to hedge the exposure can reduce overall portfolio risk.
When used appropriately, alternative investments can potentially enhance the overall risk-return profile of an investment portfolio. There are unique benefits but also unique risks associated with these non-traditional investment strategies, and as such it is paramount that investors be comfortable with alternatives when incorporating them into their investment strategy.
Some of the content above is from a research report by Baird's Advisory Services Research. Past performance does not guarantee future results. Diversification does not ensure against loss. Indices are unmanaged and not available for direct investment. This material does not constitute an advertisement for any alternative investment. Any transaction that may involve the products, services and strategies referred to in this presentation will involve risks, and you could lose your entire investment or incur substantial loss. The products, services and strategies referred to herein may not be suitable for all investors and is being provided on the basis that you have such knowledge and experience in financial and business matters to be capable of evaluating the merits and risks associated with such information. Further, you should consult with your Financial Advisor prior to engaging in any transaction described in this communication. LPL Financial does not provide legal, tax or accounting advice, and the information contained in this communication should not be considered as such. LPL Financial strongly urges you consult your tax and legal professionals prior to implementing any of these products, services or strategies.