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4 Interesting Alternatives to Round Out Your Portfolio

With the end of quantitative easing (QE) closer to becoming a reality, interest rates slowly climbing up, bonds bleeding value, and the market swinging in all directions, investors are looking everywhere for new places to put their money.

Let me say up front that stocks are the best way to build wealth over time, but diversification is important, and "alternative" strategies are certainly worth considering. Unfortunately, for those hunting that kind of escape route, most alternative assets - hedge funds, private equity, real estate and anything else you can invest in beyond stocks, bonds and cash - have generally been reserved for the "elite class" of accredited investors with a lot of wealth, high incomes or both. The theory is that while a big institutional portfolio can benefit from a touch of exposure to these vehicles, a more concentrated dose can be deadly to a nest egg or other retail-level account if the asset class sours.

But don't worry because there are still plenty of investable options for the everyday investor. And I've come up with a list of four alternative assets that deserve consideration. Let's take a look at four possibilities that I like right now.

1. Commodities have become popular as an inflation hedge, and you're probably already significantly exposed to the asset class through more conventional instruments like S&P 500 index funds, which typically have 14% to 15% of their assets invested in mining and oil stocks. More direct commodity positions historically required a special brokerage account to buy or sell futures, but in the last few years a series of exchange-traded products have emerged to hold the physical assets for retail and institutional investors alike.

The broadest is probably the DB Commodity Index fund (DBA), which invests in agricultural commodities, industrial metals, gold and a substantial (60%) weighting to oil, gas and other fuels. On the other extreme, plenty of single-metal and crop funds have hit the market, although as yet very few of them are anywhere near as liquid as the underlying commodity markets.

2. The REIT is another alternative vehicle that's gone mainstream in recent years. Hundreds of broad-based and specialized real estate companies and ETFs are available, and after a correction a few months ago, many are on the cheap side. Like any other alternative, this should be a seasoning for your portfolio and not the sauce itself. For most retail investors, a stake in an indexed fund like the Dow Jones REIT SPDR (RWR) should be more than adequate, or look into the companies that provide services to the REIT industry like HFF (HF) and Jones Lang LaSalle (JLL).

3. Private equities are also no longer an exclusive asset class for ultra-high-net-worth investors. You may not be able to buy into Bain Capital's funds, but you can certainly own shares of elite management companies like Blackstone (BX) and Apollo Global Management (APO), and share a piece of their behind-the-scenes expertise and financial success.

4. Collectibles are also an option, especially if you're looking for an exotic investment. I'm talking about classic cars, vintage wine, rare coins, fine art--which are also technically "alternative assets" and offer some of the diversification advantages of their more standardized counterparts.

Although if you're considering collectibles, it is important to note that there's a big difference between investment-grade property and stuff you happen to just find appealing. Evaluating collectibles takes money and deep knowledge of long-term market trends.

If you do decide to invest in these alternatives, I recommend you also keep at least some of your entire portfolio in bonds. These are wealth preservation vehicles, not high-performance wealth accumulators. While you shouldn't be fully invested in bonds, it does not hurt to have a few in your portfolio. Just remember to diversify your money to limit risk.

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