How Much Should You Have in Alternative Investments?http://www.fool.com/retirement/general/2011/04/19/how-much-should-you-have-in-alternative-investment.aspx Dan Caplinger
April 19, 2011
Investing used to be a very simple process: keep enough cash on hand to cover immediate expenses, and then divide up the rest of your money between stocks and bonds, depending on how much risk you wanted to take and how long you had before you needed to spend your money.
Now, though, you'll find a bunch of new types of investments covering asset classes you may never have heard of before. In many cases, it makes sense to include these alternative investments in your portfolio. The question, though, is where they fit in a balanced investment strategy and what they should replace in your existing holdings.
Going beyond stocks and bonds
Let's take a look at several of the more popular alternatives and figure out where they should go in your portfolio.
1. Real estate investment trusts
In the post-bubble real estate world, different REITs serve different functions. Mortgage REITs like Hatteras Financial (NYSE: HTS ) and American Capital Agency (Nasdaq: AGNC ) are essentially bonds on steroids, providing strong leveraged income that's ultimately based on interest rates. But more traditional REITs that own actual properties rather than just mortgage-backed securities are more a play on real estate values and therefore look more like stocks.
REITs can reasonably make up 5% to 10% of a portfolio, taking the place of either bonds or stocks depending on which type of REITs you choose to buy.
2. Master limited partnerships
Companies like Cheniere Energy Partners (AMEX: CQP ) and Buckeye Partners (NYSE: BPL ) own energy-related assets like pipelines, refineries, and natural resources themselves. Because of their limited-partnership structure, these investments take advantage of tax breaks like depletion and depreciation to pay out far greater amounts than their taxable inc