"Business Week" magazine has a good article in the October 2, 2006 issue on p.93 on Alternative Investments. It is titled, "Before You Leave the Beaten Path..." and is by Aaron Pressman. Mr Pressman gives you the typical pitch you might receive from a broker and then tells you what the reality of investing in that asset class is like. I will cover each of the assets he covers and summarize the reality section of his article.
Timber - Returns can be good and diversified but will take a very long time to realize. You need several hundred thousand dollars to invest even with timber investment management organizations or TIMOs. Management fees are 2% or higher.
Rare Coins - You have two legitimate rating agencies to ensure authenticity and good diversification. Coin prices are negotiated and expert advice is expensive. Buying and selling take time. Collections have to be stored in secure, humidity controlled locations. Collectibles are eligible at best for the 28% capital-gains tax rate.
Gold - Popular as an inflation hedge, gold can get stuck in a price range for a very long time. I quote the article, "People who bought gold at $800 in 1980 are still waiting to break even." Gold sometimes is correlated with stocks in the short run.
International Real Estate - Too expensive and too time consuming to assemble your own portfolio you need to buy a fund. Great returns but terrible liquidity as investors usually can't withdraw their funds for years.
Oil - Price is highly correlated to economic growth with sizable daily swings. Energy partnerships are historically subject to mismanagement and other non-oil related risks. Since the stock market as a whole is also correlated to economic growth this asset might not provide the diversification you want.
If you invest in alternative investments, because of their high volatility you should not have more than 5% or so invested in any asset class.
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