Weighing Risk vs. Reward
Beyond Traditional
The traditional Efficient Frontier asset mix may not offer sufficient diversification or risk management. One possible solution may be the addition of asset classes that have little or no correlation to equities or fixed income—that is, their movement is not tied to either equities or bonds.
While many investors have more access to and knowledge of a wide range of alternative investments, it’s still important for them to be aware of both their risks and returns.
Potential Benefits
Despite the unique aspects of various types of alternative investments, many do share some common potential benefits:
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Many provide improved diversification (i.e. non-, low or moderate correlation) when added to a traditional portfolio consisting of stocks and bonds (as seen on the historical correlation chart)
- Alternative investments may provide the opportunity for enhanced returns when added to a traditional portfolio (as seen on the risk/return trade-off chart)
- The addition of alternative investments to a traditional portfolio may decrease risk of the overall portfolio (as seen on the risk/return trade-off chart)
Potential Risks
As with any investment, traditional or alternative, there are inherent risks of investing in alternatives and many hold the opportunity to lose most or all money invested.
- The more you invest in leveraged instruments, the more the leverage will magnify any gains or losses on those investments.
- The use of short selling involves increased risks and costs. You risk paying more for a security than it received from its sale. Theoretically, stock sold short have the risk of unlimited losses.
- The use of derivatives such as futures, options and swap agreements may expose an investment to additional risks that it would not be subject to if you invested directly in the securities underlying those derivatives.
- Additionally, certain alternative strategies tied to hard assets such as commodities, currencies and real estate, may be subject to greater volatility as they may be affected by overall market movements, changes in interest rates or factors affecting a particular industry, commodity or currency,–such as droughts, floods, weather, livestock disease, embargos, tariffs and international economic, political and regulatory developments.
The alternatives strategies and asset classes mentioned are not suitable for all investors. Many alternative strategies use sophisticated and aggressive investment techniques such as leveraging, short selling and derivatives. The more you invest in leveraged instruments, the more the leverage will magnify any gains or losses on those investments. The use of short selling involves increased risks and costs. You risk paying more for a security than you received from its sale. Theoretically, stocks sold short have the risk of unlimited losses. The use of derivatives such as futures, options and swap agreements may expose an investment to additional risks that it would not be subject to if you invested directly in the securities underlying those derivatives. Additionally, certain alternative strategies tied to hard assets such as commodities, currencies and real estate, may be subject to greater volatility as they may be affected by overall market movements, changes in interest rates or factors affecting a particular industry, commodity or currency, –such as droughts, floods, weather, livestock disease, embargos, tariffs and international economic, political and regulatory developments. No investment strategy can guarantee a return in a declining market. Additionally, an investor could lose all or a substantial amount of their investment. For more information about these strategies and their risks please consult your financial advisor.
This material is not intended to be a comprehensive overview of the subject matters discussed. It is intended to be general in nature and should not be construed as investment advice or a recommendation of any specific security or strategy. Before investing in any of the investment products or strategies discussed, consult with your financial advisor to determine if they are appropriate for your objectives, risk tolerance, income level and investing time horizon.
Rydex SGI offers funds with investment strategies similar to those referenced on getalts.com.
Read the fund’s prospectus carefully before investing. It contains the fund’s investment objectives, risks, charges, expenses and other information. Download a prospectus or call 800.258.4332 for complete information.
The funds are distributed by Rydex Distributors, Inc. (RDI). Security Global InvestorsSM is the investment advisory arm of Security Benefit Corporation (Security Benefit). Security Global Investors consists of Security Global Investors, LLC, Security Investors, LLC and Rydex Investments. Rydex Investments is the primary business name for PADCO Advisors, Inc. and PADCO Advisors II, Inc. SGI and RDI are affiliates and are subsidiaries of Security Benefit.
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