Alternatives—A New Piece of the Pie
The financial crisis of 2008 exposed shortcomings in the traditional stock and bond portfolio—the longtime remedy for diversification.
Alternative investments may not be highly correlated to either the return-seeking or the risk-reducing slices of your portfolio. Because of this, they offer the potential for greater diversification.
What Is Correlation?
Correlation is a key indicator of how alternatives behave. It’s a statistic that tells us how closely the returns of one investment track another’s returns over time. When it comes to correlations, lower is usually better.
What happens when you invest in assets with low or no correlation to the other assets in your portfolio? When some investments perform poorly, others will likely perform well. This "diversification" may help reduce your portfolio’s volatility.