Building an Alternatives Allocation

A traditional 60/40 stock/bond portfolio can be enhanced with a 10-20 percent alternatives allocation drawn proportionally from stocks and bonds. A moderate approach: 50 percent stocks, 30 percent bonds, 20 percent alternatives. The alternatives sleeve might include 8 percent REITs, 5 percent commodities/gold, 5 percent cryptocurrency, and 2 percent private investments. The key principle: alternatives should improve the portfolio's risk-adjusted return—they must either increase return for the same risk, reduce risk for the same return, or ideally both. If adding an alternative increases volatility without improving expected return, it does not belong.