There is a general
assumption that Exchange Traded Funds (ETFs) can act as a hedge against market
volatility. Maybe that is because some view them as a passive investment. As
one 2015 study about passive investing that appeared on the
Securities and Exchange Commission’s website illustrated, ETFs "are
playing the leading role in the rise of passive investing.”
The authors continue on to
note that some have suggested that, because of their passivity, ETFs contribute
to “portfolio diversification,” which is important for any investor, and
especially those who are investing for retirement.
This is true only in part,
according to the authors of the study. They write that ETFs are an easy way to
buy the index for individual investors. As a result, they attract a lot of
demand and have seen tremendous growth over the past two decades. The fact that
ETFs are inexpensive relative to buying the underlying stocks also attracts
tremendous interest. Basically, the trading strategies that were too expensive
without ETFs suddenly become more affordable, easy and popular, thanks to these
instruments.
When I was recently
interviewed on this subject, I suggested that weighting your portfolio with
ETFs does not represent true diversification. More complete diversification --
what we call “21st-century diversification” -- includes alternative investment
vehicles, such as direct investment in private small businesses, turnkey rental
real estate and possibly even digital currencies. This is important because
alternative investments are only thinly correlated to the stock and bond
markets.
Overall, making alternative
investments can be a very good strategy because they zag when the public
markets zig. So, the next question becomes: How do I access these investments?
With the rise of several dozen mechanisms available to allow investments with
small dollar amounts into everything from commercial real estate to direct
investments into small businesses via lending or purchasing equity, it has
never been easier to make alternative investments.
An even better option is
emerging: you can diversify your retirement savings portfolio by leveraging the
power of the self-directed solo 401(k) or self-directed IRA. These instruments
are imbued with certain tax benefits, as well as the ability to make
alternative investments. I expect that more and more companies will emerge in
the future to help investors take advantage of those instruments. Companies now
exist to allow investors to participate with as little as a $100 minimum
investment to buy a small stake in a commercial office building, buy secondary
market shares of high-value private companies and lend money to a local
business in your community.
How much should you place in
alternative investments? A truly diversified portfolio could contain up to
10-30% of alternative investments, such as real estate, to withstand market
volatility.
Click
here for the original article from Forbes.