When it comes to diversifying an investment portfolio, most people probably think of stocks and bonds, as well as investing across different sectors and industries. However, there is a category of investments gaining in popularity that offer additional diversification benefits: alternative investments. Investopedia defines an alternative investment as “an asset that is not one of the conventional investment types, such as stocks, bonds and cash. Most alternative investment assets are held by institutional investors or accredited, high-net-worth individuals because of the complex natures and limited regulations of the investments. Alternative investments include private equity, hedge funds, managed futures, real estate, commodities and derivatives contracts.” However, the track record of private equity and hedge funds has burned many investors and scared away potential investors.
AAII Weekly Survey Question
To get an idea of how popular alternative investments are among our readers, last week’s survey question asked:
How much of your overall portfolio is invested in “alternative investments?”
Here are the results:
In all, 1,937 readers participated.
I was a bit surprised to see that 50% of our readers invest in some type of alternative investment. While we didn’t pose the question, I would guess that the majority of the alternative investments held by our readers is real estate.
Among the 50% of our readers who hold alternative investments, 45% of them hold less than 5% of their entire portfolio in alternative investments.
Nearly 27% of readers with alternative investments say they make up between 5% and 10% of their portfolio.
More than 14% of the readers holding alternative investments say they comprise more than 20% of their entire investment portfolio.
The remaining 13% of those saying they own alternative investments stated they make up between 11% and 20% of their portfolio.
Weekly Special Question
Given the even split between those readers who invest in alternative investments and those who don’t, last week’s special question offers insight into why retail investors seek out or ignore alternative investments:
What are your reasons for investing in or avoiding alternative investments?
In all, we received 406 responses.
While the weekly survey question was 50-50 between those who invest in alternative investments and those who don’t, the responses for the weekly special question were overwhelmingly from those who don’t invest in them (77% versus 23%).
The most oft-mentioned reason for not investing in alternative investments is their complexity or lack of understanding of them at 15%. Another 12% of respondents say alternative investments are too risky. Rounding out the top-three responses for those who don’t invest in alternative investments, nearly 6% say they don’t invest in them because they aren’t aware of the how to go about doing it.
Among those respondents who do invest in alternative investments, the biggest benefit they offer is diversification (17% of all responses).
Here is a sampling of the responses we received as to why readers invest in or avoid alternative investments:
- “I get a better return from alternative investments.”
- “I am already retired 11 years and want to avoid high-risk investments that require close monitoring.”
- “They are complex and lack transparency.”
- “I see them as expensive in terms of charges, and as creating excessive risk.”
- “Too much research needed.”
- “Too many unknowns—suspicious of manipulation.”
- “They are all similar to gambling!”
- “It’s easier to invest in stocks, bonds and funds, and to get information about them.”
- “Wouldn’t know what to buy.”
Everybody has an opinion! Why not give us yours? Participate in our weekly member poll, updated every Monday, and see the results online at www.aaii.com/memberquestion.