Part I began my discussion about Alternative Investments by trying to help with an understanding of the terms used. I referenced some of the investments that are thought of as “alternatives” and began to provide definitions for some of the words and phrases necessary if you’re going to employ Alternative Investments in your portfolio.

As a financial professional with gray hair, the majority of people who are either my clients today or are likely to become my clients tomorrow, are focused on money for retirement. This is the point in your life when you stop working for money and money starts working for you. And whether we like it or not, having more money is better in our society than having less money.

Most of us are painfully aware of what happened in 2008 and early 2009 and have a natural reluctance as we put our feet back in the water. While I don’t expect there will be another financial hiccup like the last one during my lifetime, that’s not to say there won’t be corrections, some of them painful.

But in order to have more money, you have to be prepared to put it to work and risk some pain. In America, most of the money accumulating in retirement accounts is in long-only, market directional portfolios. This means that the owners of those accounts are completely dependent on the markets’ having to rise in value in order to have the necessary funds for a “successful” retirement. ( I put ‘successful’ in quotes since your definition of ‘success’ could be quite different from mine…)

Your 401(k) portfolio may be well diversified among large cap stocks, small cap stocks, bonds and international flavors of each, but ultimately, they are bound by the long-only, buy-and-hold dictates of traditional asset class diversification. And if 2008-2009 happens again, well, I hope you have a long time before you have to retire, or you are nearly dead already. Don’t plan on that, either.

But investing in alternative assets by itself will not, in and of itself, get you out of the long-only, buy-and-hold dilemma. You have to develop an understanding of (or find someone who does) non-directional, alternative-investment strategies. Alternative investments and alternative strategies are not two sides of the same coin.

Non-correlated investments are investments that typically move in value patterns that do not mirror each other. Rather than move in sync, in the same direction in response to market pressures, they tend to move in opposite directions, which is why they are called non-correlated. If some of your money is inveseted in long-only, buy-and-hold investments, then perhaps it makes sense to put some of the rest in non-correlated investments. The trick is to decide how much, what kind, and do you have enough time to manage it yourself, or would it make sense to find someone who does this for a living. And always assuming you find such a person, how much do they charge, and do they really know what they are doing. I will argue that those folks can be found and that they will provide you with a window of comfort that you will not enjoy without them.

Non-directional, alternative investment strategies can now be found in mutual funds, if you know where to look, and know what you are seeing when you get there. Some of them are called absolute-return funds, which means the manager of that fund has almost exclusive ability to put your money anywhere in the world, when, and in any amount, if he or she thinks it will work. I’ve worked with one of these funds for seven years, whose mandate is “…is to avoid losses across any calendar year. The secondary objective is to maximize long-term returns in a way that is consistent with the first objective.” With the exception of 2008, they have been successful.

Part III, coming next week, will talk about Real Estate and its role as an alternative investment.