Can I afford alternative investments?

Q. I keep hearing about alternative investments like real estate. I can’t afford to buy a house. Is there another way to buy alternative investments like gold?
— Investor

A. Alternative investments can be a good way to help balance your portfolio, but you need to make sure you understand how they work.

The term “alternative investment” has come to mean a lot of different things and has gained traction over the past few years as individuals, advisors, and institutions are seeking alternatives to traditional investments like stocks, bonds, and cash, said Michael Gibney, a certified financial planner with Modera Wealth Management in Westwood.

“These types of investments are available to retail investors like you and me through various mutual funds or exchange-traded funds (ETFs), so there is no need to buy a house or a brick of gold,” Gibney said.

One reason often cited for seeking these “alternatives” is because bonds and cash have been experiencing very low returns for the past few years due to historically low interest rates, he said.

While alternatives can have a place in some well diversified portfolios, they can be very volatile and risky investments on their own, he said.

“So if you already have a well-diversified portfolio and are looking to further diversify, then you may benefit by possibly adding a diversifier, such as a real estate fund and/or a precious metals fund,” Gibney said.

Alternatives may reduce the risk and add stability to a broadly diversified portfolio with the potential for increased returns. However, Gibney said, he would tread lightly and be very careful if you are considering investing directly in this type of alternative, rather than through a mutual fund or ETF.

Email your questions to ask@njmoneyhelp.com.

Karin Price Mueller writes the Bamboozled column for The Star-Ledger and she’s the founder of NJMoneyHelp.com. Click here to sign up for the NJMoneyHelp.com weekly e-newsletter. Like NJMoneyHelp.com on Facebook and follow it on Twitter.