Step 8: Add Alternatives

INVESTMENT EXPERTS often talk about four asset classes: stocks, bonds, cash investments and alternative investments. This last category includes a hodgepodge of investments, including real estate investment trusts (REITs), commodities funds, gold funds, hedge funds and mutual funds that pursue hedge-fund-like strategies. In each case, the hope is the same—that these investments will not only generate decent long-run gains, but also they’ll perform unlike the broad stock market and, indeed, they may post gains when stocks next nosedive.

The problem: None of this is guaranteed, the funds involved often charge high costs and many are actively managed. In HumbleDollar’s opinion, a small allocation to a low-cost REIT index fund or a gold stock fund is okay. But the other offerings available to everyday investors are far from enticing—and they’re arguably unnecessary.

Why? Despite the hoopla over alternatives, most investors already have sufficient portfolio protection. When stocks perform poorly, your bond holdings shouldn’t fall as much—and, while this didn’t happen during 2022’s stock market decline, they might even post handsome gains. Looking for something that will salvage your portfolio’s performance when stocks tumble? Maybe bonds are all you need.

Next: Step 9: Keep Your Balance

Previous: Step 7: Tilt Your Portfolio

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