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June 2006 The value of alternative investments Though the future is uncertain, you can build an investment portfolio today that is diversified and designed to be resilient through all long-term economic and political cycles. True diversification implies that each asset class you select for your portfolio derives its returns in fundamentally different ways. This article will focus on the role of alternative investments in an investment portfolio. Alternative investments include oil, natural gas, industrial metals, precious metals and agricultural goods. Because returns from alternative investments come from a completely different economic source than the financial assets in a portfolio, alternative investments provide valuable diversification. Historically, investment returns from alternative investments do not mirror the performance of the global equity and bond markets. In fact, prices on alternative investments can run counter to the trend in stocks and bonds. Augmenting a portfolio of stocks and bonds with a diversified basket of alternative investments can help smooth out performance peaks and valleys. To achieve maximum diversification benefits, it is best to own a direct investment in alternative investments, as opposed to ownership of common stock in companies that produce those same alternative investments. Equity returns from companies that produce alternative investments are too closely tied to the performance of the overall equity market to deliver the diversification benefits alternative investments offer. In times of global instability and/or rising inflation, alternative investments have performed well. Consider the alternative investment we purchase most frequently: oil. Rising oil prices have a negative impact on corporate profits worldwide; conversely, falling oil prices have a positive impact. While falling corporate profits may hurt equity performance, your portfolio's exposure to oil can at least cushion the declines. With asset allocation as a guide, you can build a properly diversified investment portfolio and have the confidence to stay the course over the long term, regardless of short-term market behavior and economic and political swings. Investment discipline and investor confidence are your most powerful assets to protect your lifestyle, both for today and in the future.
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