These alternatives often furnish attractive ways to store and build wealth. Their relative attractiveness is potentially greatest when stockmark ets do not appear to offer prices lower than values, a prudent time to consider investing in these asset classes. Alternatives also include any mix of these asset classes invested in tax advantaged vehicles such as individual retirement accounts (IRAs) and 401(k) plans.
Most investors tend to end up with a diversified mix of these different asset classes: home ownership, some cash on hand, a retirement vehicle, and a stockand bond mix. Those who do not should try to do so. Diversity across asset classes is important as a way to preserve wealth. If 100% of wealth were allocated to stocks and the stockmark et overall dragged for a decade, total wealth would erode. If a portion of the wealth were stored in bonds and the bond market performed favorably over that time, much of the wealth would be preserved.
One problem with investments made through tax-advantaged plans is a lackof diversification in the asset classes offered. Many plan menus are weighted disproportionately toward stockfunds. Many people simply elect an even allocation between the items on the menu. Many others simply allocate 100% to the stockfunds. Either way, assets are allocated heavily toward stocks. Heavy stock weighting may be prudent for very young people and even for older people, but only so long as other (non-plan) assets are in different classes.
Putting all your eggs in the stock market basket is imprudent asset allocation. Once you have allocated your assets across different classes, the portion you allocate to stocks need not be diversified. In short, asset diversification is far more important than stockportfolio diversification.
Beyond asset preservation, the ultimate issue in asset allocation— as in investing in general—is the prior and larger question of opportunity cost. You want to invest your money in the assets most likely to produce the greatest return in future periods. The general principles for evaluating that likelihood are pretty much the same across asset classes. The form of the asset itself guarantees nothing about its relative attractiveness, a question that depends on its context.
That said, there are plenty of exotic asset classes that most people are better off staying far clear of, ranging from innocuoussounding instruments such as convertible bonds to the more mysterious zones of private equity and hedge funds (more on this below).
The business analysis mind set is just as important in assessing these alternative asset types as it is in investing in common stocks. While each asset type warrants attention to the peculiar issues associated with it (the price of silver depends on supply and demand for the metal, for example), a mind-set trained in thinking as a business analyst about common stocks can easily adapt itself for application to these other asset classes (that is why this bookconcentrates on common stocks).
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