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3 ways to creatively diversify your investment portfolio

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When you think of investments, you probably think of putting money in a specific stock or mutual fund. While those are probably the most widely known investment vehicles, there are a few other investment options that can help you to effectively plan for retirement and diversify your portfolio.

Zero coupon bonds— This type of security doesn't pay interest (a coupon) to the investor, but is traded at a deep discount, providing profit at maturity when the bond is redeemed for its full value. These are typically long-term investments that can take ten years or more to mature to full face value. One of the greatest advantages of zero coupon bonds is to reduce portfolio risk by locking in a known level of return on investment. Investors can purchase different kinds of zero coupon bonds in the secondary markets that have been issued from a variety of sources, including the U.S. Treasury, corporations, and state and local government entities.

Annuities— An annuity is an investment vehicle that pays out income. Annuities are a popular choice for investors who want to receive a steady income stream in retirement.

Here's how an annuity works: you make an initial investment in the annuity (which is an insurance product), and it then makes payments to you on a future date or series of dates. The income you receive from an annuity can be paid out monthly, quarterly, annually, or even in a lump sum. You can choose to receive payments for the rest of your life or for a specific number of years. How much you receive depends on whether you opt for a guaranteed payout (fixed annuity) or a payout stream determined by the performance of your annuity's underlying investments (variable annuity). While annuities can be useful retirement planning tools, they are also known to have high investment expenses.

Managed futures— Managed futures are an alternative investment strategy in which professional portfolio managers use futures contracts as part of their overall investment strategy. Managed futures provide portfolio diversification among various types of investment styles and asset classes to help diminish portfolio risk in a way that is not possible in direct stock investments. Professional money managers, also called commodity trading advisors, typically monitor managed futures accounts. A diversified managed futures account will generally have exposure to a number of markets such as

  • Commodities—cotton, cocoa, coffee, sugar
  • Metals or Energy—gold, silver
  • Agriculture—soybeans, corn, wheat
  • Equity Indexes—S&P futures, Dow futures, NASDAQ 100 futures
  • Currency—foreign currency, U.S. government bond futures

Introducing futures into a portfolio reduces risk because of the negative correlation between asset groups. This means that when traditional markets are experiencing growth, managed futures are not doing as well, however, when traditional markets are not doing well, managed futures are typically profitable.

*Before implementing any particular investment strategy, make sure to fully research the risks, rewards, time horizon, and fees involved, either on your own or through the advice of a financial advisor.*

For more personal finance tips, visit my blog: Money Savvy Living.

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