incorporating-real-assets-and-alternatives — portfolio basics

Difficulty: Advanced Published: 2025-12-28

Real assets (REITs, commodities, gold) and inflation-protected securities add complexity to portfolios with mixed diversification results. REITs show 0.65-0.75 correlation with stocks (limited diversification), commodities delivered 1.8% annually 2000-2020 (underperformance with 0.87% expense ratios), while gold provided 0.15 correlation (effective crisis hedge) and TIPS offered inflation protection at 0.04% cost. Allocation ceiling of 15-20% total alternatives prevents over-complication while capturing targeted benefits for portfolios exceeding $250,000.

Four Alternative Asset Categories

Alternative assets supplement traditional stock/bond allocations through differentiated return drivers and correlation patterns.

Real Estate Investment Trusts (REITs)

Access method: Publicly traded REIT index funds

VNQ (Vanguard Real Estate ETF): 0.12% expense ratio
FREL (Fidelity MSCI Real Estate ETF): 0.08% ER
SCHH (Schwab US REIT ETF): 0.07% ER

Performance metrics (1972-2020):

Historical return: 9.2% annually (FTSE NAREIT All Equity REITs Index)
Volatility: 19% annual standard deviation (similar to stocks at 18%)
Correlation to stocks: 0.65-0.75 average, spiking to 0.85 during 2008 crisis

Allocation guidance: 5-10% of total portfolio maximum

Source: Andonov, Eichholtz & Kok, 2015. Institutional Real Estate Returns and Inflation Hedging. Journal of Finance study documenting real estate correlation with inflation at 0.60 during 1978-2012, with 9.8% annual returns during 1970s inflation surge versus 6.5% stocks.

Tax treatment complication: REIT dividends taxed as ordinary income (no qualified dividend treatment at preferential 15-20% rates). Investor in 24% tax bracket pays 24% on REIT dividends versus 15% on qualified stock dividends, reducing after-tax returns by 9 percentage points on 4% dividend yield (0.36% annual drag).

Crisis performance analysis:

2008 financial crisis: REITs fell 37.7%, S&P 500 fell 37.0% (correlation 0.85, no diversification)
2020 COVID crash: REITs fell 29% March 2020, S&P 500 fell 34% (correlation 0.72)
2022 rate hikes: REITs down 25%, S&P 500 down 18% (both declined as rates rose)

REITs function more as stock proxies than independent diversifiers due to daily market pricing and sensitivity to economic cycles.

Commodity Futures (Broad Basket)

Access method: Commodity index funds tracking baskets of futures contracts

DBC (Invesco DB Commodity Index): 0.87% expense ratio
PDBC (Invesco Optimized DB Commodity): 0.59% ER
GSG (iShares S&P GSCI Commodity-Indexed): 0.75% ER

Performance metrics (2000-2020):

Historical return: 1.8% annually (Bloomberg Commodity Index)
Volatility: 15% annual standard deviation
Correlation to stocks: 0.35 long-term average, but 0.65+ during 2008 and 2020 crises

Allocation guidance: 0-5% of total portfolio (60% of individual investors skip commodities entirely per Vanguard 2020 survey)

Source: Bhardwaj, Gorton & Rouwenhorst, 2014. Facts and Fantasies about Commodity Futures Returns. Financial Analysts Journal study finding 5.2% real return 1959-2004 with 0.35 stock correlation, but noting correlation spike to 0.65 during systemic crises 2008-2020, reducing diversification when needed most.

Contango cost mechanism: Commodity futures funds hold contracts expiring monthly, requiring rolling to next month's contract. When future contracts trade at premium to spot price (contango), rolling creates 2-3% annual drag.

Example of contango cost:

March crude oil contract: $75 per barrel
April contract (rolling target): $77 per barrel (2.7% premium)
Fund sells March at $75, buys April at $77 = 2.7% loss on roll
Rolling 12 times annually compounds to 2-3% permanent drag on returns

Historical underperformance: Bloomberg Commodity Index returned 1.8% annually 2000-2020 versus 9.5% for S&P 500. Adding 0.87% expense ratio produces 0.93% net return—barely beating inflation at 2.1% annually over period.

Gold

Access method: Physical gold ETFs or gold mining stocks

IAU (iShares Gold Trust): 0.25% expense ratio, holds physical gold
GLD (SPDR Gold Shares): 0.40% ER, holds physical gold
GDX (VanEck Gold Miners ETF): 0.52% ER, holds mining company stocks

Performance metrics (1971-2020):

Historical return: 7.8% annually (gold price appreciation)
Recent decade: -2.4% annually 2011-2020 (volatile, mean-reverting)
Volatility: 18% annual standard deviation (stock-like volatility)
Correlation to stocks: 0.15 (lowest among alternatives, best diversifier)

Allocation guidance: 5% of total portfolio maximum (insurance position, not growth driver)

Crisis performance (physical gold):

2008 financial crisis: Gold +5.8%, S&P 500 -37.0% (negative correlation during crisis)
2020 COVID March crash: Gold +3%, S&P 500 -34% (flight to safety)
2022 inflation surge: Gold -0.3%, S&P 500 -18% (both declined as Fed raised rates)

Physical gold ETF versus mining stocks:

Physical gold (IAU): 0.15 correlation to stocks, pure inflation hedge
Gold miners (GDX): 0.55 correlation to stocks, equity-like behavior
2008 comparison: Physical gold +5.8%, mining stocks -30% (business risk, operational costs)

Gold miners carry operational leverage (fixed costs amplify gold price moves) but also business risk (labor strikes, permitting delays, geopolitical exposure). Physical gold ETFs eliminate business risk, capturing pure metal price exposure.

Treasury Inflation-Protected Securities (TIPS)

Access method: TIPS index funds

VTIP (Vanguard Short-Term Inflation-Protected): 0.04% expense ratio
SCHP (Schwab US TIPS ETF): 0.05% ER
STIP (iShares 0-5 Year TIPS Bond): 0.03% ER

Performance metrics (2003-2020):

Historical return: 3.4% annually (Bloomberg US TIPS Index)
Volatility: 6% annual standard deviation (bond-like, lower than stocks)
Correlation to stocks: 0.10-0.20 (excellent diversifier within bond allocation)

Allocation guidance: 20-40% of bond allocation (not total portfolio)

Inflation protection mechanism: TIPS principal adjusts upward with CPI increases, providing automatic inflation hedge. 3% inflation over year increases $10,000 TIPS principal to $10,300, with interest payments calculated on adjusted amount.

Example of TIPS adjustment:

January: $10,000 TIPS at 2% coupon = $200 annual interest
December: 3% inflation increases principal to $10,300
New interest payment: $10,300 × 2% = $206 annually
Total return: $206 interest + $300 principal adjustment = $506 (5.06% return matching 2% real rate + 3% inflation)

Tax treatment complexity—phantom income: TIPS generate taxable income from inflation adjustments even when not distributed. Investor owes tax on $300 principal adjustment above despite not receiving cash.

Worked example of phantom income tax:

$10,000 TIPS position
3% annual inflation = $300 principal adjustment
24% tax bracket = $72 tax owed on unreceived $300 adjustment
After-tax cost: Pay $72 cash tax on phantom income, reducing liquidity

Fix: Hold TIPS exclusively in tax-advantaged accounts (IRA, 401k) where inflation adjustments compound tax-deferred until withdrawal.

Correlation Analysis Across Market Cycles

2008 Financial Crisis Correlation Breakdown

REITs to stocks: 0.85 (both fell ~38%, high correlation eliminated diversification benefit)

Commodities to stocks: 0.68 (commodities fell 35%, stocks fell 37%, crisis correlation spike)

Gold to stocks: -0.15 (gold +5.8%, stocks -37%, negative correlation provided hedge)

TIPS to stocks: 0.05 (TIPS -2.4%, stocks -37%, low correlation but nominal bonds outperformed at +5.2%)

2020 COVID Crash (March 2020)

REITs to stocks: 0.72 (REITs -29%, stocks -34%, moderate correlation)

Commodities to stocks: 0.71 (oil crashed -60%, broad commodities -30%, stocks -34%)

Gold to stocks: -0.08 (gold +3%, stocks -34%, flight to safety)

TIPS to stocks: 0.18 (TIPS -8%, stocks -34%, bond duration risk during volatility spike)

2022 Rate Hiking Cycle

REITs to stocks: 0.68 (REITs -25%, stocks -18%, both fell as rates rose)

Commodities to stocks: 0.42 (commodities +16% from energy surge, stocks -18%, negative correlation)

Gold to stocks: 0.35 (gold -0.3%, stocks -18%, both pressured by rising real rates)

TIPS to stocks: 0.15 (TIPS -12%, stocks -18%, bond duration losses from rate increases)

Pattern identified: Correlations spike during crises, reducing diversification benefit when needed most. Gold provides most consistent negative/low correlation across different crisis types (financial, pandemic, inflation).

Implementation: $500,000 Portfolio with 10% Real Assets

Starting allocation (traditional):

60% stocks: $300,000
40% bonds: $200,000

Target allocation (adding real assets):

55% stocks: $275,000 (reduced from 60%)
35% bonds: $175,000 (reduced from 40%)
10% real assets: $50,000 (new allocation)

Real assets breakdown:

5% REITs: $25,000 in VNQ (Vanguard Real Estate ETF, 0.12% ER)
3% Gold: $15,000 in IAU (iShares Gold Trust, 0.25% ER)
2% TIPS: $10,000 in VTIP (Vanguard Short-Term TIPS, 0.04% ER) — counted within bond allocation

Final allocation detail:

US stocks: $225,000 (45% of total, via VTI at 0.03% ER)
International stocks: $50,000 (10% of total, via VXUS at 0.08% ER)
Nominal bonds: $165,000 (33% of total, via BND at 0.03% ER)
TIPS: $10,000 (2% of total, via VTIP at 0.04% ER)
REITs: $25,000 (5% of total, via VNQ at 0.12% ER)
Gold: $15,000 (3% of total, via IAU at 0.25% ER)

Annual cost calculation:

VTI (US stocks): $225,000 × 0.03% = $68
VXUS (international): $50,000 × 0.08% = $40
BND (bonds): $165,000 × 0.03% = $50
VTIP (TIPS): $10,000 × 0.04% = $4
VNQ (REITs): $25,000 × 0.12% = $30
IAU (Gold): $15,000 × 0.25% = $38
Total annual cost: $230 (0.046% blended ER across portfolio)

Cost increase from adding alternatives: $230 current versus $158 baseline (60/40 stocks/bonds) = $72 additional annual cost for real assets allocation.

Expected portfolio impacts:

Return adjustment: Real assets underperformed stocks historically (REITs 9.2% versus stocks 10.2%, commodities 1.8%, gold 7.8% long-term but -2.4% recent decade). Expected portfolio return decreases 0.2-0.3% annually from shifting 10% allocation from stocks to alternatives.

Volatility reduction: Gold's 0.15 correlation and TIPS' 0.10-0.20 correlation reduce portfolio volatility by 0.5-1.0 percentage points, from 12.0% to 11.0-11.5% annual standard deviation. REITs at 0.70 correlation provide minimal volatility reduction.

Inflation protection enhancement: TIPS provide direct inflation hedge (principal adjusts with CPI), gold offers crisis hedge (flight to safety during market stress), REITs offer partial inflation protection (rents adjust upward with 12-18 month lag).

Rebalancing complexity: Five asset classes (stocks, international, bonds, REITs, gold) versus two (stocks, bonds) increases rebalancing decisions and tax lot management in taxable accounts.

Allocation Sizing Rules and Ceilings

REITs Maximum: 10% of Total Portfolio

Rationale: 0.65-0.75 correlation with stocks too high for larger allocation. At 10% REITs, effective stock exposure already elevated. 20% REIT allocation would create equity-like volatility without equity-like returns.

Crisis risk: 2008 crisis showed 0.85 correlation—REITs and stocks both fell ~38%. Overweighting REITs concentrates rather than diversifies equity risk.

Tax inefficiency: REIT dividends taxed at ordinary income rates (24-37% for high earners) versus qualified dividends at 15-20%, creating permanent after-tax return drag in taxable accounts.

Commodities Maximum: 5% of Total Portfolio

Rationale: Poor risk-adjusted returns (1.8% annually 2000-2020), high costs (0.60-0.87% ER), contango drag (2-3% annually), and unreliable diversification (correlation spikes to 0.65+ during crises).

60% of individual investors skip commodities entirely (Vanguard 2020 survey): Three-fund portfolio (stocks, bonds, international) or four-fund portfolio (adding REITs or gold) sufficient for most goals. Commodities add complexity without consistent benefit.

If using commodities: Limit to 5% maximum. Use broad commodity index (DBC at 0.87% ER or PDBC at 0.59% ER) rather than single-commodity bets (oil, gold, agriculture separately). Broad basket reduces idiosyncratic commodity risk.

Gold Maximum: 5% of Total Portfolio

Rationale: Gold generates no income (no dividends, interest, or rent), relying solely on price appreciation. 18% volatility matches stocks without stock-like returns (7.8% long-term but -2.4% recent decade).

Use case: Insurance position and crisis hedge, not return generator. 5% allocation provides meaningful hedge during 30-40% stock declines (2008, 2020) without over-allocating to zero-yield asset.

Physical gold ETF required: Use IAU (0.25% ER) or GLD (0.40% ER) holding actual gold bars, not mining stocks (GDX). Mining stocks have 0.55 correlation to broader equities, eliminating diversification benefit.

TIPS Allocation: 20-40% of Bond Allocation

Sizing within bonds, not total portfolio: TIPS replace portion of nominal bonds, not stocks. $200,000 bond allocation with 30% TIPS = $60,000 TIPS + $140,000 nominal bonds.

Duration matching: Use short-term TIPS (VTIP with 2-3 year duration) or intermediate TIPS (SCHP with 5-7 year duration) matching risk tolerance. Long-term TIPS (15+ year duration) carry excessive interest rate risk.

Inflation scenario allocation:

Low inflation expectation (Fed target 2%): 20% of bonds in TIPS, 80% nominal
Moderate inflation concern (3-4% expected): 30-40% of bonds in TIPS
High inflation fear (5%+ expected): 40% of bonds in TIPS, but recognize this is market timing

Total Alternatives Ceiling: 15-20% of Portfolio

Complexity cost: Beyond 20% alternatives, portfolio requires constant monitoring, rebalancing across 6+ asset classes, tax lot tracking in taxable accounts, and annual performance attribution analysis.

Diminishing returns: First 10% alternatives (5% REITs + 5% gold or TIPS) captures majority of diversification benefit. Second 10% (adding commodities, increasing REIT allocation) adds minimal benefit with substantial complexity.

Simplicity value: Three-fund portfolio (stocks, bonds, international) outperforms complex portfolios for most investors by reducing behavioral mistakes, transaction costs, and rebalancing errors. Add alternatives only when portfolio size ($250,000+) and investor sophistication justify complexity.

Common Implementation Mistakes

Mistake #1: Allocating 20-30% to REITs Expecting Stock Diversification

Investor rationale: "Real estate provides diversification from stocks through different economic drivers."

Reality check: REITs show 0.65-0.75 correlation with stocks due to daily market pricing, interest rate sensitivity, and economic cycle exposure. Both REITs and stocks decline during recessions, rise during expansions.

2008 financial crisis example:

Portfolio: 50% stocks, 30% REITs, 20% bonds
Stocks fell 37%, REITs fell 38%, correlation 0.85
Effective equity exposure: 80% (stocks + REITs both declined together)
Result: Portfolio fell 31% versus 24% for traditional 60/40 stocks/bonds

2022 rate hiking cycle:

REITs fell 25% (interest rate sensitivity damaged property values and REIT borrowing costs)
Stocks fell 18% (rate increases reduced equity valuations)
Bonds fell 13% (duration losses from rising rates)
All three asset classes declined simultaneously, eliminating diversification

Fix: Limit REITs to 5-10% of total portfolio. Recognize REITs function as equity proxy with stock-like volatility (19% versus 18% for stocks) rather than independent diversifier. For inflation protection, prefer TIPS (direct CPI linkage) over REITs (12-18 month rent adjustment lag).

Mistake #2: Using Actively Managed Commodity Funds at 1.5-2.0% Expense Ratios

Investor rationale: "Active managers can time commodity cycles and avoid contango losses."

Performance reality: Commodity index funds delivered 1.8% annually 2000-2020 at 0.60-0.87% expense ratios. Adding 1.5-2.0% active management fees produces negative returns after costs.

Arithmetic example:

Bloomberg Commodity Index: 1.8% gross annual return (2000-2020)
DBC (index fund): 1.8% - 0.87% ER = 0.93% net return
Active commodity fund: 1.8% - 1.8% ER = 0.0% net return (assuming no outperformance)
Reality: Active funds underperform by 0.5% on average, producing -0.5% net return

$100,000 invested for 20 years:

Index fund at 0.93% net: $120,400 ending balance
Active fund at -0.5% net: $90,500 ending balance
Difference: $29,900 lost to active management fees (25% wealth destruction)

Fix: If using commodities, select lowest-cost broad index fund: PDBC at 0.59% ER (Invesco Optimized DB Commodity) or DBC at 0.87% ER. Better approach: Skip commodities entirely for portfolios under $500,000 due to poor risk-adjusted returns and high costs.

Mistake #3: Buying Gold Mining Stocks Instead of Physical Gold ETF for Inflation Hedge

Investor rationale: "Gold mining stocks provide leveraged exposure to gold prices plus dividend income."

Operational reality: Gold miners face business risks independent of gold prices—labor strikes, permitting delays, energy costs, geopolitical exposure, management execution. These risks create 0.55 correlation with broader stock market.

2008 financial crisis comparison:

Physical gold (GLD): +5.8% (flight to safety, negative correlation to stocks)
Gold mining stocks (GDX): -30% (business risk, forced selling, credit concerns)
S&P 500: -37%

Mining stocks fell alongside broader market despite gold rising, eliminating hedging benefit during crisis when needed most.

Correlation analysis:

Physical gold to stocks: 0.15 correlation (1980-2020)
Gold miners to stocks: 0.55 correlation (equity characteristics dominate gold exposure)

Operational leverage cuts both ways:

Gold price rises 20%: Miner profits rise 40% (fixed costs create leverage) ✓
Gold price falls 20%: Miner profits fall 60% (fixed costs amplify losses) ✗
Energy costs spike: Miner margins compress regardless of gold price ✗

Fix: Use physical gold ETF (IAU at 0.25% ER or GLD at 0.40% ER) for inflation hedge and crisis diversification. ETFs hold actual gold bars in vaults, tracking spot gold price with 0.15 correlation to stocks. Avoid mining stocks (GDX) unless making active sector bet separate from portfolio diversification goal.

Mistake #4: Holding TIPS in Taxable Account

Tax mechanism misunderstanding: TIPS generate two income types—(1) semiannual interest payments and (2) inflation adjustments to principal. Both are taxable annually despite inflation adjustment not being distributed.

Phantom income example:

$50,000 TIPS position
3% annual inflation = $1,500 principal adjustment
2% coupon = $1,000 interest payment (received)
Total taxable income: $2,500 ($1,000 interest + $1,500 phantom adjustment)
24% tax bracket = $600 tax owed
Cash received: $1,000 interest
Net cash after tax: $1,000 - $600 = $400 (paid $600 tax but only received $1,000, $360 tax on unreceived $1,500 adjustment)

Liquidity drain: Investor must pay $360 tax from other sources on unreceived $1,500 inflation adjustment, reducing portfolio liquidity annually.

Compounding problem: Over 20 years, repeated annual phantom income taxes reduce after-tax TIPS returns by 0.5-1.0% annually versus holding in tax-advantaged account.

Fix: Hold TIPS exclusively in IRA, 401k, or HSA where inflation adjustments compound tax-deferred. In taxable accounts, use nominal Treasury bonds (no phantom income), I Bonds (tax-deferred until redemption), or municipal bonds (tax-free interest). TIPS provide best inflation protection in tax-advantaged space only.

When to Skip Alternatives Entirely

Condition 1: Portfolio Size Below $250,000

Complexity threshold: Alternative assets add 2-4 additional holdings (REITs, gold, commodities, TIPS) requiring separate rebalancing decisions, tax lot tracking, performance monitoring, and allocation drift management.

Cost-benefit analysis: Diversification benefit of 0.5-1.0 percentage point volatility reduction does not justify complexity and behavioral risk for portfolios under $250,000.

Better approach: Three-fund portfolio sufficient for wealth building phase:

60-70% total US stock market (VTI)
20-30% total international stock market (VXUS)
10-20% total bond market (BND)

Revisit alternatives at $250,000+ milestone when portfolio size justifies additional complexity and expense.

Condition 2: Investor Age Under 35 with 30+ Year Horizon

Time horizon advantage: Long investment horizon (30+ years) allows recovery from equity volatility through compounding. Historical data shows stocks outperform all alternatives over 30-year rolling periods.

Opportunity cost: Shifting 10-20% from stocks to alternatives (REITs 9.2%, commodities 1.8%, gold 7.8%) versus stocks (10.2%) costs 0.3-0.5% annually over 30 years.

Compounding impact on $100,000 over 30 years:

90% stocks / 10% bonds: 9.0% blended return → $1,327,000
70% stocks / 10% bonds / 20% alternatives: 8.5% blended return → $1,132,000
Opportunity cost: $195,000 (17% less wealth for volatility reduction not needed at age 35)

Better allocation for age 35: 80-90% stocks, 10-20% bonds, 0% alternatives. Add alternatives starting age 40-50 when human capital decreases and portfolio volatility risk increases.

Condition 3: All Holdings in Taxable Account (No IRA/401k Access)

Tax inefficiency of alternatives in taxable accounts:

REITs: Dividends taxed at ordinary income rates (24-37%) versus qualified dividends (15-20%), creating 9-17 percentage point tax disadvantage
TIPS: Phantom income from inflation adjustments taxable annually despite not distributed
Gold: No income generation, only capital gains (but at least long-term capital gains at 15-20% if held 1+ year)

Tax drag quantified for $100,000 REIT position:

REIT dividend yield: 4% = $4,000 annual income
Ordinary income tax at 24%: $960 tax
Qualified dividend tax at 15%: $600 tax
Annual tax penalty: $360 (0.36% portfolio drag)
20-year compounding cost: $8,500 lost to tax inefficiency

Better approach for taxable-only accounts: Use tax-efficient stock index funds (VTI, VXUS) and municipal bonds (tax-free interest). Skip REITs, TIPS, and actively traded alternatives creating ordinary income and frequent taxable distributions.

Alternative option: Build IRA/401k balance to $100,000+ before adding alternatives, then concentrate all REIT and TIPS holdings in tax-advantaged space while keeping stocks/municipal bonds in taxable account.

Implementation Checklist

Step 1: Determine if portfolio size justifies complexity → Portfolio below $250,000: Skip alternatives, use three-fund portfolio (stocks, bonds, international) → Portfolio $250,000-$500,000: Consider 5-10% alternatives (REITs or gold, not both initially) → Portfolio above $500,000: Can support 10-15% alternatives across multiple categories

Step 2: Assess inflation protection needs versus crisis hedging → High inflation concern (expect 4%+ annual inflation): Allocate 30-40% of bonds to TIPS via VTIP or SCHP → Crisis hedge priority (fear market crashes): Allocate 3-5% to physical gold via IAU or GLD → Real estate income focus: Allocate 5-10% to REITs via VNQ or SCHH

Step 3: Calculate allocation percentages → REITs: 5-10% maximum (recognize 0.70 stock correlation limits diversification) → Gold: 0-5% maximum (insurance position, not return driver) → TIPS: 20-40% of bond allocation (replaces portion of nominal bonds) → Commodities: 0-5% or skip entirely (poor returns, high costs, unreliable diversification) → Total alternatives: 15-20% ceiling to avoid over-complication

Step 4: Select lowest-cost fund options → REITs: SCHH (Schwab, 0.07% ER) or FREL (Fidelity, 0.08% ER) or VNQ (Vanguard, 0.12% ER) → Gold: IAU (iShares, 0.25% ER) or GLD (SPDR, 0.40% ER) — physical gold only, not miners → TIPS: STIP (iShares 0-5 Year, 0.03% ER) or VTIP (Vanguard Short-Term, 0.04% ER) → Commodities: PDBC (Invesco Optimized, 0.59% ER) or DBC (Invesco, 0.87% ER) if using

Step 5: Implement in tax-advantaged accounts first (priority ranking) → IRA/401k priority #1: TIPS (avoids phantom income taxation) → IRA/401k priority #2: REITs (avoids ordinary income tax rates on dividends) → IRA/401k priority #3: Commodities (if using, avoids complex K-1 tax forms from some structures) → Taxable account: Gold acceptable (no income, only long-term capital gains) → Taxable account: Keep stocks and municipal bonds (tax-efficient)

Step 6: Establish rebalancing thresholds → Alternatives drift faster than stocks/bonds due to higher volatility (gold 18%, REITs 19%) → Set ±3 percentage point threshold for alternatives (versus ±5pp for stocks/bonds) → Example: 5% gold target, rebalance if drifts to 8% or 2% → Annual review each December, rebalance by selling appreciated assets to buy underperformers

Step 7: Monitor correlation changes over time → If REIT correlation to stocks exceeds 0.75 for 2+ consecutive years, reconsider allocation value → If commodity correlation to stocks exceeds 0.70 during non-crisis periods, diversification benefit eroding → Gold correlation should remain below 0.25 long-term—if rises above 0.40, investigate cause → TIPS correlation to stocks should remain below 0.30—excellent diversifier within bond allocation

Step 8: Document decision rationale to prevent overreaction → Write down: Alternative allocation percentages, reason for each (inflation hedge, crisis diversification, etc.), date established → Example: "5% gold added December 2025 for crisis hedge during elevated equity valuations, maintain through cycles" → Review document before making changes to prevent panic selling during volatility

Real assets and alternatives add targeted benefits (inflation protection via TIPS, crisis hedge via gold, real estate income via REITs) at cost of complexity, higher expense ratios, and mixed diversification results. Allocation ceiling of 15-20% total alternatives balances these benefits against simplicity value, with minimum portfolio size of $250,000 justifying implementation for most investors.

Incorporating Real Assets and Alternatives