Diversify Your Investment Portfolio with Alternative Assets

If you’ve ever felt nervous about putting all your money into stocks and bonds, you’re not alone. Diversifying with alternative assets—like real estate, private equity, commodities, or crypto—can help smooth returns, reduce correlation with public markets, and give you exposure to opportunities that traditional holdings don’t offer. I’ll walk you through what alternative investments are, why they matter, and practical ways to add them to your portfolio without losing sleep over liquidity or fees.

What are alternative assets?

In simple terms, alternative assets are investments outside the usual stocks, bonds, and cash. That includes real estate (direct ownership and REITs), private equity, hedge funds, commodities (gold, oil), collectibles, and digital assets like cryptocurrencies. For a concise primer, Investopedia has a useful overview of alternative investments.

Why add alternative assets to your portfolio?

• Lower correlation: Many alternatives don’t move in lockstep with the stock market, so they can reduce overall portfolio volatility.
• Potential for higher returns: Some alternatives (private equity, venture capital) have historically delivered outsized returns—at higher risk.
• Inflation hedge: Real assets like real estate and commodities often hold value when inflation heats up.
• Diversification of risk: Different return drivers (rent, commodity prices, private company growth) spread risk across sources.

Common types of alternative assets and how to access them

Real estate

Direct ownership (rental properties) is hands-on and can produce steady cash flow. But if you want passive exposure, consider REITs or real estate funds. Fractional platforms and crowdfunding let you invest in property with much smaller sums than buying a house yourself.

Private equity and venture capital

Traditionally limited to institutions and high-net-worth investors, private equity is now more accessible through interval funds, business development companies (BDCs), and some specialized ETFs. These investments can be illiquid and have long lock-ups, but they offer exposure to companies before they hit public markets.

Commodities

Commodities like gold, oil, and agricultural goods can hedge inflation and geopolitical risk. You can invest via physical holdings, futures contracts, ETFs, or commodity-focused mutual funds.

Hedge funds and alternatives funds

Hedge funds use strategies—long/short equity, arbitrage, derivatives—that aim to deliver returns uncorrelated with markets. Access can come through mutual funds, ETFs with alternative strategies, or accredited-only hedge funds.

Cryptocurrencies

Crypto is one of the newer—and more volatile—alternatives. It can offer portfolio growth but requires careful sizing and a high tolerance for swings. If you’re curious, start small and treat it as a speculative slice of your allocation.

How to incorporate alternatives without overdoing it

I recommend treating alternative assets as complements, not replacements, to your core portfolio. Here are practical steps:

1. Define your objective

Are you seeking income, growth, inflation protection, or lower volatility? Your goal informs which alternatives fit best.

2. Start small and scale

A common approach is to allocate 5–15% of your portfolio to alternatives, increasing only if you understand the assets and their risks. For younger investors with a longer horizon, the higher end might make sense; for retirees, keep allocations conservative.

3. Mind liquidity and fees

Private equity and some real estate vehicles can lock up capital for years. Alternatives also often carry higher fees. Always read prospectuses and understand lock-up periods. If you want a quick read on strategic allocation principles, Vanguard’s guide on asset allocation is helpful.

4. Use funds for diversification

If you don’t want to pick properties or private companies one-by-one, consider diversified funds—REIT ETFs, commodity ETFs, or alternative strategy ETFs—that give exposure with lower minimums and easier rebalancing.

5. Rebalance and monitor

As with any allocation, rebalance periodically. Alternatives can outperform and take a larger share of your portfolio over time, unintentionally increasing risk. Set a calendar reminder—quarterly or annually—to check allocations and rebalance as needed.

Risks to keep in mind

Alternatives are not a free lunch. Be aware of:

• Illiquidity: You may not be able to sell quickly without a discount.
• Higher fees: Management and performance fees can erode returns.
• Complexity: Some strategies require more due diligence and expertise.
• Tax considerations: Real estate and collectibles have unique tax rules; consult a tax pro.

Real-life example

Last year, a friend added 10% to alternatives: 5% REITs, 3% commodities via ETFs, and 2% in a private RE investment through a crowdfunding platform. During a volatile quarter in equities, the REIT income and commodities helped cushion the drawdown. It wasn’t a magic fix, but the portfolio felt less correlated and gave peace of mind.

Final thoughts

Diversifying your portfolio with alternative assets can provide meaningful benefits—if done thoughtfully. Start with small allocations, prefer diversified funds if you’re new, and always match alternatives to your goals, liquidity needs, and risk tolerance. If you want more articles and practical tips on building a resilient portfolio, check out our Investing category.

Want help picking the right mix? Talk to a financial advisor who understands both traditional and alternative investments before making large commitments.