Most people turn to traditional options for personal finance matters like stocks, bonds, and real estate. They do not know that there is another option called alternative investments, which provide opportunities for diversification and possibly even greater returns. It includes a wide range of assets that are different from traditional options.
Understanding alternative investments
Alternative investments are referred to as non-traditional investment vehicles. This type of investment is usually meant for individuals who want a diversified portfolio with higher returns. The difference between traditional and non-traditional are traditional investments are available for all types of investors. In comparison, opportunities for alternative investments are limited to wealthy investors such as high-net-worth individuals. Since this provides many different options, investors would get a chance to build their portfolios by spending on securities that offer improvements in their investment base.
Although, purchasing alternative investments would face more challenges than sticking with traditional assets. The risks are just as significant despite potentially higher returns and better diversification. But if you consider diving into alternative investments, perform thorough research first.
There are two types of alternative investments, tangible and intangible.
Tangible investments
These are assets that have a physical existence. Real assets, personal properties, or hard assets are tangible investments. Some are assessed on their appreciation ability, while others are evaluated on their ability to make income as they face depreciation. Below are some examples of these assets:
Commodities. These point toward real assets such as precious metals and natural resources. Putting investments in grains or precious metals like gold or silver has been recommended for a long time. It is considered an effective barrier against market movements and currency alterations.
Real estate. This is another example of an effective alternative investment for investors. Putting money into houses, plots, rental yields, and commercial assets are some ways of directly investing in real estate. On the other hand, investors can also indirectly invest in real estate through Real Estate Investment Trusts (REITs). This is typically helpful in hedging against inflation since the low co-relationship between equity markets and real estate drives it.
Collectibles. These can be stamps, artwork, or even vintage wine, mainly considered mere prestigious souvenirs. However, they are considered significantly valuable assets for investors who know how profitable these collectibles are. Usually, stamps, coins, and art are classes suitable for tangible alternative investments.
Intangible investments
These assets cannot be seen or checked. However, their status and value can be tracked and evaluated based on market performance. Some intangible investments include:
Hedge funds. Investment vehicles like these cater to investors with spacious pockets. They are sometimes considered options for accredited investors. But because they are not as regulated as mutual funds, investors can invest in a broader range of securities. A quality that stands out from hedge funds is their liquidity quotient. They can sell off in a short amount of time amid high exposure to liquid securities.
Private equity. These are equities that are not included in stock exchanges. Institutional investors directly put these funds in private companies and use them in buyouts for public companies. In return, the firms will use the capital for organic and inorganic growth as they expand their footprint, improve marketing operations and technological advancement, and make smart acquisitions.
Venture capital. Here, investors spend on equity capital in private startups with excellent growth potential. It is similar to the private equity concept. But venture capitalists mainly invest in early-stage businesses. Others invest when they reach expansion. Its investment horizon ranges from three to seven years. Also, the expected return rate is high, but a risk quotient is linked to it.
Cryptocurrency. It is an intangible asset wherein currencies are recorded at an acquisition cost. It could be either the paid price or the considered cost. Moreover, the damage cost is assessed and tracked after proper evaluation. Based on experts, the cryptocurrency’s value can change over time while being recorded on a balance sheet.
Alternative investments can offer you benefits like:
Higher returns
Compared to traditional investments, alternative options frequently offer the opportunity for higher returns. They can generate good profits if successful. Assets like commodities can provide positive returns during certain market conditions.
Diversification
Adding alternative investments into a portfolio can lessen overall risk and possibly improve returns through diversification since they have a low correlation with conventional assets.
Inflation barrier
Commodities and real estate, both under alternative investments, are known for acting as a hedge against inflation. Their values are likely to rise during inflation periods. As a result, it provides a safety net for investors’ purchasing power.
Despite all the advantages that you can gain from alternative investments, they can also have risks like:
Higher volatility
Alternative investments are more open to experiencing higher volatility compared to traditional investments. Changes in the market, geopolitical events, and some aspects can greatly impact their value. Therefore, it can lead to a significant gain or loss.
Illiquidity
Most alternative investments are illiquid, which means they cannot be easily bought or sold. Assets like private equity, venture capital, and particular hedge funds have lock-in periods, making it easier for investors to access invested funds before a specific date.
Lack of information
This type of investment involves complex structures and strategies that make it hard for investors to understand their concerns fully. Furthermore, reliable data about alternative investments can be more limited than publicly-traded assets. It can frustrate investors when it comes to their decision-making process.
Alternative investments provide opportunities for investors to experience diversification, greater returns, and a shield against inflation. But keep in mind that they can also come with risks and disadvantages.
Whether you are more interested in conventional or alternative investments, it is still vital to carefully study your risk tolerance, research, and maybe consider asking for professional advice before getting yourself into alternative investments. If you successfully gain enough knowledge about the benefits, risks, and challenges, you can make wise decisions in building an enhanced investment portfolio. When formulating strategies for alternative investments, consider getting ideas from fund managers who are always updated and assess market trends.
