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Would investing in alternative assets be a wise choice for those saving for their retirement? The answer to that question is really in the eye of the beholder – or investor.

Before investing in alternative assets, you should have at least a basic understanding of what they are and the advantages and disadvantages associated with them.

What are alternative assets?

Alternative assets are those securities that aren’t typically found in a more conventional portfolio. What you would typically find in a more conventional portfolio are stocks, bonds, and cash. Alternative assets are things like private-equity funds, hedge funds, commodities, Real-estate investment Trusts (REITs), and venture capital.

Advantages of investing in alternative assets

Investing in alternative assets offer the potential for large returns to investors who are willing to accept higher risk. As is the case, in any investment, the greater the risk, the greater the potential for gain. One of the more attractive aspects of investing in alternative assets is they sometimes bring extraordinary gains.

Another advantage to investing in alternative assets is portfolio diversification. Maintaining a well-diversified portfolio of 25 to 30 securities across a broad range of asset classes provides the most cost-effective level of risk reduction. Because alternative assets aren’t closely correlated to securities traded in the public markets they are an excellent way to diversify a portfolio and reduce risk in a retirement portfolio.

Because alternative assets are sometimes illiquid, they’re typically less volatile. This makes them a good hedge against inflation. And in some strategies, illiquid assets enable managers to add value in inefficient sectors.

Disadvantages of investing in alternative assets

Investing in alternative assets requires a higher level of knowledge and expertise on the part of the investor. This can make them less appropriate for the average investor. Also, many of these investments are illiquid which may make it difficult to find a sufficient market for a particular security. This also makes it hard to accurately determine the current value or a particular security.

It’s important to also note that investing in alternative assets can subject the investor to a higher risk of investment fraud than most conventional investments would pose. However, this can be mitigated by a higher level of due diligence by the investor — an important component of any wise investment plan.

Finally, many alternative investments may become more volatile in periods of financial turmoil. They may also have a higher correlation to stocks and other traditional investments during these times than they otherwise would.

Are alternative assets right for you?

If you’re a fairly risk averse investor, alternative assets would probably not be a good fit for you. But if you can afford to take on more risk in your portfolio, and you have the disposition to do so, alternative assets can be a very rewarding investment.

The bottom-line: in a volatile market like we’re experiencing now, a properly diversified portfolio of traditional asset classes enhanced by alternative investments could provide both downside protection and upside potential. Talk with your adviser to see what makes sense for you.