Five Alternative Investments to Protect Your Portfolio

US News lists five alternative investments to protect your portfolio as follows:

• Real estate -- The bogeyman of this downturn should still—someday—be a viable part of your portfolio. The housing bust makes it easy to shun the sector entirely, but real estate investment trusts, or REITs, historically offer unique risk-management benefits.

• Inflation-protected securities -- A slowing economy and the threat of deflation haunt the market today, but the return-killing specter of inflation will eventually re-emerge, if history is any guide. A small allocation of treasury inflation-protected securities, or TIPS, helps lower the risk of unexpected jumps in prices.

• Commodities -- It may not be happening right now, but commodities generally move in the opposite direction of both stocks and bonds, especially over long periods of time. Plus, commodities tend to perform best when your portfolio needs them most. A dollop of commodities offsets the risk of inflation, allowing you to buy longer-dated bonds with higher yields.

• Fixed annuities -- Annuities aren't for everyone, but for retirees considering how to make shrinking portfolios last, they're worth keeping in mind. Fixed annuities are contracts issued by insurance companies that provide regular payments until the end of the holder's life. They offer some of the best security against ups and downs in investment returns at a time when you'll be spending your hard-won gains in retirement.

• Stable-value funds -- Offered through retirement accounts, including IRAs, stable-value funds are a conservative answer for investors looking for just a bit more return than the usual money market fund provides. Stable-value funds are essentially agreements between an issuer and an insurer who agree to keep the fund's value stable. Volatility and risk are generally low for stable value.

Other than real estate (through owning my home), I don't have any of these. Inflation-protected securities and commodities are options I should likely investigate while fixed annuities and stable-value funds don't hold much interest for me. How about you -- any of these either part of your current portfolio or something you want to check out?

Comments

[Randy]

I'm 55 years of age, as is my wife, and we are aiming to retire at 60. We have about 70% of our retirement assets in TIPS, primarily in individual issues, not funds. I reallocated this $$ out of stocks at DOW 12500 (on the way up).
I'd recommend your blog devotees read "Spend 'til the End" by Scott Burns and/or "Worry Free Investing" by Zvi Bodie for a bit more education on TIPS.
For someone in my situation, with the retirement nest egg already accumulated, TIPS make a LOT of sense. Especially at current yields.
Love your website.

[mjmcinto]

I have a decent position in a commodities ETF, and will continue to grow that position (along with others of course). The reason is I used to work for a commodities trading company (in IT, but had direct interaction with the business), and as such, started to learn more about the business and the analyses, trending and trading. While I'm taking a beating right now, I realize I'm young, and that commodities will go up, and will help to guard against inflation (note I said help...it's only part of my strategy).

[Bill]

I've done a lot of looking at annuities and came to this conclusion. They are the McDonalds of investing. You have a strong guarantee of what you will get, but it comes at the cost of a lot of fat. Returns on annuities may be stable, but the fees are way too high for a product that you can easily build for yourself.

The lesson I learned in car sales was this...the more obscure and hocus pocus you can put on what and where the money is going the more commission the saleman earns. If you own any finacial product that you cannot explain where every dollar goes (at purchase) and what you can reasonably expect to get back later, you have just made someone on the sell-side very happy (and there are some very sad investors on the buy-side e.g. Orange County with Bonds, Charities with Mr. Madoff, anyone buying an annuity)

[Marc Ryan]

Fixed annuities are an interesting product to consider as investors move into retirement age, and become concerned about outliving their money. Unfortunately distrust of insurance companies generally has reduced our interest in this product. Conversely,financial advisers and insurance companies are much more likely to try to sell you actively managed mutual funds or variable annuities (called segregated funds in Canada- which have nothing in common with fixed annuities other then the name) because of the high fees they skim off the top. However, there are many good reasons why you should consider annuities as you turn into your 70's (I know it is a long way off for most of us, but old age has a knack for creeping up on us faster then we realize).

[Uri]

Another missing from the list is managed futures, which has performed well this year.

More importantly, though, while these asset classes do provide asset diversification, they can't provide enough to really make you feel safe. Supposing your portfolio is down 40% YTD, if you had added any of these classes you might only be down 35%. Sure, that's a lot of money and relatively good but is it enough of a difference to make you feel confident about keeping your money invested? No. Some of these other asset classes might but only if you have a significant allocation to them and in that case you expose yourself to new problems such as lack of inflation protection (stable value funds), inflation protection with no growth (commodities), inflation protection based on poor models for inflation (TIPS), lack of diversification (real estate - ie your house), unrealized investment risk (annuities - your insurer may default on annuity in current market). Would you have been happy with 5%/yr 2 years ago when even balanced funds were returning >10%?

For better or worse, we are stuck with stocks and bonds.

[Uri]

Microcaps are also frequently forgotten (or just hard to acquire). DFA offers a good fund but you'll have to find an adviser willing to pass up on the kickback to sell these funds. There are only two such advisers in the Boston area!

[Sarah]

It seems like a fixed annuity could be a fine idea when you hit actual retirement age. Of course, there is the counterparty risk alluded to above, which will take some thinking, but when your horizon is probably only 15 to 20 more years, it's time to look for stability, I think. People in fixed annuities (as far as I can tell, variable annuities are nothing but scams) are probably a lot happier this year than even people in the "income protection" funds, and in your old age, you actually do want to minimize the risk of even a single crappy year.

You'd need to have enough saved to hold back some funds for emergencies, though.

[Rich]

I just finished reading a book on commodities, it was pretty interesting, especially considering the low correlation between stocks and commodities. The difficulty is finding a proper way to invest in them, unless you're looking at precious metal ETFs.
I will probably start looking at REITs again in a few years, but right now I don't think they're such a good investment.