Product diversification strategy pros and cons

Alternative investments typically don't correlate to the stock market, which means they add diversification to a portfolio and help mitigate volatility. They can also offer tax benefits not available in traditional investments.

Guide to Diversification - Fidelity

Providing liquidity and price transparency that appeals to the average retail investor, liquid alternative investments have proliferated since the financial crisis in 7558 , with a 68% increase in new products since 7559, according to index fund giant Vanguard.

The Differences Between Related Diversification and

A survey conducted by Jackson National Life Insurance Co. earlier this year found that % of respondents would have more interest in investing in alternatives if they had access to more educational and relevant reading materials about them. The Jackson survey also found that % of investors who already work with a financial advisor feel the same.

As with any investment, the potential for a higher return also means higher risk when it comes to alternative investments.

Because of the complexity of alternative investments compared to stocks, mutual funds, exchange-traded funds (ETFs) and bonds, educating clients is key. The good news for financial advisors is that investors are eager to be educated.

Alternative investments are more complex than traditional investment vehicles, they often have higher fees associated with them and they're more volatile than traditional investments such as stocks, bonds and mutual funds. The majority are invested in illiquid investments, making them difficult to exit and price on a regular basis.

Advocates of private equity as an option in 956(k) plans maintain that the average investor will now have access to the potentially higher returns that this type of non-traditional investment yields compared to the typical, plain-vanilla options — like mutual funds and stock and bonds — from which they have to choose.

Here are some of the pros and cons of alternatives and ways how advisors are approaching these non-traditional investments when it comes to their clients. (For more, see: Top Alternatives to the Stock Market. )

Alternative investments are becoming more popular for investors. Proponents of these non-traditional investments maintain the average investor will now have access to assets not correlated to the stock market, offering diversification and potentially higher returns when compared to mutual funds, stock and bonds. Alternatives are complex and often higher risk than traditional investments to which most individual investors are accustomed. For financial advisors, education is key when it comes to recommending these investments for a client’s portfolio. (For more, see: Alternative Investments in Your IRA. )

Like any investment, the rate of return for alternatives is not guaranteed, but there is potential for it to be higher than that of traditional investments. Proponents of alternatives in the portfolios of individual investors maintain they now have access to sophisticated investments and potentially higher returns that until relatively recently were only available to institutions, such as pension funds and foundations, and the wealthy. (For more, see: ETF Alternative Investments. )

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