Introduce Your Portfolio to Alternatives
Investing doesn't just have to be about stocks andbonds. Other investments, such as alternativeinvestments, may be a good fit for your portfolio.Because their pattern of return typically does not correlateclosely with those of stocks and bonds, alternativeinvestments can complement returns while potentiallyreducing your portfolio's overall ups and downs.
Although they can enhance your portfolio, alternativeinvestments such as the following should probablybe a modest percentage of your overall financialplan: managed futures, master limited partnerships(MLPs), and real estate investment trusts (REITs).
•Managed futures. A futures contract is anexchange-traded agreement to buy or sell a fixedamount of some commodity for future delivery on acertain date. The commodity could be cattle, corn,coffee, or some other physical commodity; it couldalso be a financial commodity, such as a currency.Because few physician-investors have the time or theexperience to manage a diversified futures accounton their own, physician-investors can buy managedfutures funds. Professional managers known as commoditytrading advisors trade futures in dozens ofnontraditional markets (ie, global) in an attempt togenerate returns in any economic environment.
Keep in mind there are significant risks associatedwith managed futures and they are not suitable for allphysician-investors. You could lose all or a substantialamount of your investment. Risk of loss is due to thespeculative and leveraged aspects of trading, fluctuatingprices, and the unpredictability of market direction.Exchange rules limiting price fluctuations and settingspeculative position limits may also increase risk.
•MLPs. A publicly traded partnership orientedtoward the energy sector, an MLP trades like a stockon a securities exchange. Individual physician-investorsbuy ownership interests, or units, in thepartnership through a stock exchange similar to purchasingshares of a stock in a company. MLPs are aparticularly attractive investment because of theirhigh dividend yields and ability to grow.
As always, these investments are not suitable forall physician-investors, as you could lose all or a substantialamount of your investment. Investing in anMLP involves risks that differ from investments incommon stocks; rising interest rates could adverselyimpact the financial performance of MLPs. Also,there are certain tax risks associated with investing inMLPs and conflicts of interest between common unitholders and the general partner, including those arisingfrom incentive distribution payments.
•REITs. A REIT company owns and, in mostcases, operates income-producing real estate such asapartments, shopping centers, offices, and hotels. AREIT can be an efficient way for physician-investorsto invest in a commercial or residential real estatebusiness, by combining many of the features of realestate and stock investing. REITs also offer diversificationby investing in multiple properties.
However, REITs may be less liquid and contain ahigher risk of principal loss than other forms of publiclytraded equity investments. In addition, REITsmay be more appropriate for physician-investorswilling to assume a higher degree of risk for theopportunity of potentially greater returns.
Before you invest in alternatives, you need toreassess your portfolio, asset allocation, and risk tolerance,all of which ultimately determine how youwill reach your financial goals. If you're not sure howyou shape up, take the time to review with yourfinancial consultant to discover the nature of yourcurrent investments and how well they work together.Evaluating your holdings and financial goals willenable you to improve your portfolio's diversificationby broadening your selection beyond the traditionalrange of investments.
is vice president, investments, and a financial
consultant with AG Edwards in Hillsborough, NJ. He welcomes
questions or comments at 800-288-0901, or visit www.agedwards.com. This article was provided by AG Edwards & Sons,
Inc, member SIPC.
Joseph F. Lagowski
