Diversification is a strategy that makes it possible to hold many types of investments in one portfolio. Typically, diversification lowers risks when the returns on different assets are not closely correlated with each other, writes CFP Roger Wohlner in a U.S. News & World Report article. Because the future is always uncertain, adding unusual investments to your portfolio means that you might increase your overall returns if these investments perform well, although each investment carries its own risks. Prudence dictates that investors thoroughly understand the risks of any investment before shelling out cash.

Life Settlements

Investigate life settlements, which allow investors to buy into a pool of life insurance policies. This investment is not an insurance product nor an openly traded security. Rather, it’s a private offering that allows an investor to buy into a life insurance pool and become the beneficiary of the pool’s life insurance policies. The minimum investment in California ranges from $15,000 to $25,000, but rules vary among the states. According to financial adviser Adam J. Hurley, “Life settlement shares are not correlated to any market. We’ve found that the projected yield to maturity is 65 percent.” The downside of life settlements is that people are living longer, which can reduce annual returns. Another risk involves the ratings of the life insurers — by sticking to pools that contain policies issued by highly rated insurers, you decrease the risk of the insurer defaulting or going bankrupt.

Equity-Indexed Annuities

Consider investing in annuities, which are contracts that allow you to pay premiums now, invest the premiums in a tax-sheltered account and receive cash payments later. An equity-indexed annuity offers a return made up of fixed and variable portions. The variable portion is linked to a benchmark index, such as the S&P 500. Hurley says he’s keen on “attractive indexed annuities that charge small upfront fees, have limited downside risk and provide tax-advantaged income for life.” But equity-indexed annuities can be complex, may provide smaller returns than would direct investments in the index, and surrender, or early termination, fees up to 20 percent may apply.

Trust Preferred Shares

Learn about trust preferred shares, or TruPS. These are hybrid securities that combine features of bonds and preferred stock. A bank establishes a trust company and issues it a bond that becomes the trust’s sole asset. The trust then issues TruPS that trade on a stock exchange. You can buy a TruP for as little as $25 and receive quarterly distributions that count as ordinary income. TruPS often provide high yields. You can also make money if the price of the TruP increases, normally because of falling interest rates. On the downside, the trust usually can recall the shares if interest rates decline substantially and can defer some payments, which lowers the return. A rise in interest rates drives down TruP prices. Another risk is that the bond issuer might go bankrupt.

Gold Participation Bonds

Research ways to diversify you portfolio with gold and other precious metals. One vehicle for gold investing is the gold participation bond. Gold mines issue these bonds and back them with up to 20 percent of their gold reserves. Investors receive quarterly payouts composed of cash payments and shares of an exchange-traded fund indexed to the price of gold. The ETF shares trade on an exchange just like stock shares, but their value largely depends on the current price of gold. Through gold participation bonds, investors can gain exposure to the gold market and also receive cash payments. On the negative side, ETF shares lose value if the price of gold declines.