More and more it seems phrases such as “liquid alternatives” or “goals-driven investments” are being tossed around by those in the financial industry to try to convince the average investor to diversify away from a portfolio of only stocks and bonds. These terms refer to alternative investments called “alts,” which are a type of mutual fund that can be bought and sold like other funds.

Traditionally, these types of liquid investments are reserved for only the most experienced traders. But many financial professionals now recommend that these alternative investments make up 10 to 20 percent of a healthy portfolio as a way to diversify beyond tried-and-true stocks and bonds. Alts are becoming more popular as a way to smooth out portfolios rocked by a market that is increasingly becoming volatile.

Alts can be broken into two types—return seekers and risk managers. Return seekers may help boost performance through new ways of investment, such as venture capital. Risk managers live up to their name. These investments, including managed futures work to help smooth performance when the market is choppy. But that does not mean that alts are impervious to market shifts.

For example, in 2009 and 2010 private equity substantially outperformed managed futures before posting a -23% loss in 2011 while managed futures came out ahead. That trend reversed the very next year. The type of uncertainty in this example illustrates how important it is to diversify a portfolio even beyond one type of alt or investment strategy. Blending alts to a portfolio of stocks and bond can be the key to creating the perfect mix of risk and rewards in investors holdings. To paraphrase Shakespeare, “a mutual fund by any other name is just as sweet.”

Learn more about alternative investments in the infographic below.Don’t forget to comment and share using the social media buttons on this posting.

Proshares-A-New-Way-to-Look-at-Alternatives.5d

Click here to view the full infographic