# Alternative Assets: What REITs, Commodities, and Crypto Actually Add
"Alternatives" is a broad category covering everything from real estate investment trusts to cryptocurrency to fine art. The diversification claim is common to all of them. The evidence for that claim varies enormously.
REITs (Real Estate Investment Trusts)
REITs are the most evidence-backed alternative asset class. They own and operate income-producing real estate, are required to distribute 90% of taxable income, and trade on exchanges like stocks.
**Portfolio benefit:** REITs have historically had moderate correlation with equities (0.5–0.7) and meaningful correlation with inflation — they provide some inflation protection that pure equity/bond portfolios lack. Their income yield is higher than typical equities.
**Caveats:** REITs are included in broad market index funds like VTSAX (approximately 3% weight). A separate REIT allocation adds concentration, not necessarily new exposure. REITs are highly interest-rate sensitive — when rates rise, REIT valuations fall due to the discount rate effect.
**Tax:** REITs distribute ordinary income, not qualified dividends — they are tax-inefficient in taxable accounts. Hold them in tax-advantaged accounts.
Commodities and Gold
**Commodities portfolio benefit:** Commodities (oil, agricultural products, metals) have low correlation with stocks and bonds and positive correlation with inflation. During inflationary periods, commodity exposure protects real portfolio value.
**Caveats:** Commodity futures suffer from roll yield (the cost of rolling expiring contracts into new ones) in contango markets. Long-run returns on a commodity futures portfolio have been near zero or negative after roll costs. The diversification benefit is real; the return generation is not.
**Gold:** Gold occupies an unusual position — a non-productive asset (generates no earnings) with significant psychological and historical weight as a store of value. Gold has very low or slightly negative correlation with equities during market crises. Long-run real returns on gold are approximately zero — it preserves purchasing power but doesn't compound real wealth. A 5–10% portfolio allocation is the most common recommendation for crisis protection without meaningful performance drag.
Concentration Risk
Single-position risk — usually employer stock from RSUs / ESPP / options. Common rule of thumb: above 25% of net worth, concentration risk dominates returns.
Above the typical 25% prudence threshold. Plan a multi-year reduction strategy.
Educational illustration — not financial advice. Math: @/lib/finance/investing.ts.
Cryptocurrency
**Portfolio benefit:** High historical returns (with astronomical volatility). Low historical correlation with traditional assets — though correlation has increased as institutional ownership has grown.
**Caveats:** Cryptocurrency lacks intrinsic value from earnings or cash flows. Returns have been driven by adoption curves and speculation. The volatility (60–80% drawdowns are common) makes it unsuitable as a large portfolio allocation. The long-run return thesis is hypothesis, not established track record.
For investors who choose to include crypto: 1–5% of the portfolio — enough to participate in upside without a catastrophic impact on total portfolio if it falls 80%.
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*Related: [Asset allocation](./asset-allocation-age) — where alternatives fit in a complete portfolio. [Inflation erosion](./inflation-erosion-retirement) — real assets as an inflation hedge.*
Frequently Asked Questions
do REITs and commodities really diversify a stock portfolio
REITs and commodities offer genuine diversification benefits—they often move differently than stocks. However, correlations vary by market cycle; REITs rise and fall with interest rates, and commodities spike during inflation, making them imperfect hedges that require careful sizing.
should I own cryptocurrency in my investment portfolio
Cryptocurrency shows minimal correlation to traditional assets, offering diversification potential, but extreme volatility and unproven long-term value make it speculative. Most evidence-based investors cap crypto at 1-5% if included, treating it as a high-risk allocation rather than core holdings.
is gold a good portfolio hedge
Gold historically performs well during stock market crashes and high inflation, offering genuine diversification. A 5-10% allocation can reduce portfolio volatility, but gold produces no income; core portfolios should emphasize stocks and bonds with small gold positions for tail-risk protection.