When it comes to investing diversification is one of those principles it is hard to argue against but is too often ignored by people. Too often our emotional conviction towards a particular investment overwhelms our good sense to not “put all our eggs in one basket”. Fear and greed still play dominant roles in organizing financial portfolios and too often with disastrous results. Of course, the media loves to tell the stories of the one that made it big or lost it all but in the end the majority of people increase their probability of success by diversifying adequately.
What is adequate diversification in today’s investing environment? At one point it was making simple decisions such as how much in stocks versus bonds. That was a time when our choices were much more limited than they are today. In a Wall Street Journal article today entitled “Harvard’s Endowment Offers An Education In Asset Allocation” an insight into how a large endowment uses many tools to meet its objectives. One could easily dismiss this information on the belief that one could not find the appropriate tools to do the same thing. Nothing could be further from the truth! While it is true that some vehicles are only available with very large minimums today access to Alternative Investments is available through a variety of sources including Funds, Managed Futures, etc.
Twenty years ago it was difficult to convince people that it was wise to invest outside the United States and benefit by having international exposure. Today exposure to Alternative investments offers the same potential benefits of lowering volatility and enhancing long-term results. Exclude them at your own peril.