In the first six parts of this series, I’ve given you some simple definitions that apply when the conversation turns to “alternative investments”. I’ve also given you some examples that you might employ as you become more comfortable with this approach. I’m now going to summarize my position.

Basically, the market downturn on 2008 scared the hooey out of the investing public and most of us in the advisory business. It brought home the need for additional risk management as traditional asset classes were much more correlated than we first thought.

We’ve agreed there is no Websterian definition of “alternative investments”. But the consensus is they should have a low correlation to both equity and fixed-income, as well as employ both long and short strategies. I can run off a list of strategies as long as your arm but it’s only a matter of time before someone comes up with a new one, designed to accomplish the same thing.

Among 669 advisors recently surveyed by Morningstar, Inc. and Barron’s, fully 66% said they believe alternatives will be as important or more important than traditionl investments over the next five years. Among institutional investors, that number was over 70%. Clearly there is a growing consensus that alternatives have a place in a portfolio design.

The next question is how much is enough to be meaningful. Is it 10%, 20%, 30% or more? In my judgement, it depends on the nature of the alternative and how practical it is to make the transition. I believe I’ve found a solution that employs upwards of 50%.

But regardless of the percentage, there are two primary objectives. One is a low correlation to traditional asset classes and two, the ability to generate positive returns. In a perfect world, you would have something that performs well in a bear market and still remain positive in a bull market. The challenge is to have this happen over a reasonably short time frame. If you’re thinking 50 years, then what’s the point.

One alternative investment we haven’t specifically talked about are managed futures. But accept for the moment these are legitimate investments that are not highly correlated to traditional investments. From July 2000 when managed futures began, through year-end 2010, an index of managed futures had an annualized return of 8.53%. Compare that with the S&P500 return of 0.47%. While that seems fantastic, remember we had a once in a lifetime hiccup in the form of the market crash of 2008-2009. I don’t think that will happen again until long after I’m dead and buried.

Among advisors who use alternatives for their clients, two major themes emerge: the need to protect against long-only volatility in a portfolio’s equity bucket and the need to find something other than fixed income to diversify that equity bucket. If you have enough money, you can go the hedge fund route, but you have to then accept the high fees, illiquidity and general lack of transparency in traditional hedge funds.

Another caveat is you have to be cautious about letting one year of market activity dictate your strategy going forward. However, it is increasing clear that traditional asset classes, especially among equities, are increasingly correlated and that the likelihood of interest rate hikes make fixed income an unappealing diversifier.

At the end of last year, Morningstar counted 450 alternative-style funds, about half mutual funds and the other half ETFs. The question you must ask yourself is not so much whether the use of these is legitimate, but which ones, and when. If you want to find them and manage them yourself, my response is “Good luck!”

My challenge as a Registered Investment Advisor is not to re-invent the wheel and create a software package to pick and choose and manage. It is to find the best-of-breed managers, the ones with a history in this arena, and then incorporate those who rise to the surface in a package that is transparent and has a cost structure that is realistic and acceptable.

While my writing these blogs postings is designed to help you manage your own money, they are also designed to help those of you looking for help find me. I have what I think are realistic solutions to your need for a financial plan that will grow your money and help you retire when that day arrives.