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Other Asset Classes: Everything Else
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If your entire investment collection were a big fancy dinner, then bonds, stocks, and cash would be your salad, main course, and dessert. But fancy dinners also include soup and appetizers–the little things that make the meal more interesting.
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In the investment world, these side dishes include all sorts of unusual investments such as gold and other precious metals, collectibles (such as art), commodities, foreign currency, futures, and options. It also includes some fairly complex investment strategies, such as short selling, merger arbitrage, market timing, and hedging. Some of these “exotic” investments can provide a higher degree of diversification, but you should be careful about adding any of them to your investment menu.
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The biggest reason for staying away from these more exotic investments is that they can be extremely risky. While you can make big bucks investing in things such as futures, foreign currency, or investment strategies with very low correlations to more traditional investments (such as hedge funds), they are generally more risky. As such your investment can vaporize just as easily.
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They also can be expensive to access. As result, an investor needs to balance the cost of investing in these investment types with expected returns. There may be less expensive ways to achieve the same level of diversification with a more cost-effective investment.
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Another drawback with some of these investments is that they're generally illiquid. In other words, it might difficult for you to quickly get your money out once you are invested. Large volume, blue-chip stocks–such as Wal-Mart, Coca-Cola, Chevron, Verizon, Gillette–are highly liquid securities. You can buy and sell them whenever you want.
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While these exotic investments may complement some portfolios, you want to avoid any investment that you don't understand or that doesn't have a long-term track record.
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