When it comes to choosing an investment portfolio, it doesn’t have to be all stocks and bonds. In recent years, alternative investments have been gaining more attention from financial advisors and investors alike. Alternative investments can be a great way to diversify your holdings and potentially make larger returns with less risk than traditional investments. Not only that, but they can also provide a sense of adventure and exploration that you won’t find with stocks and bonds. In this article, we’ll explore the world of alternative investments, what they are, why they’re worth considering, and how to get started.
1.Diversifying Your Portfolio: Exploring Alternative Investments
Whether for a retirement fund or personal savings, building a diversified portfolio is a key investment strategy. In addition to stocks, bonds, mutual funds, and other traditional investments, it’s wise to give consideration to alternative investments. These investments, while considered more risky, can help increase portfolio diversity and offer significant return potential.
Real Estate (REITS)
- REITs provide access to income producing real estate with fewer risks compared to direct ownership.
- REITs are subject to the same real estate market cycles, but offer diversification from the stock market.
- REITs often offer higher dividend yields than bonds.
Art and Collectibles
- For passive investors who don’t want to actively manage real estate investments, art and collectibles are attractive.
- The appeal of owning works of art and collectibles is that they have the potential to appreciate in value over time.
- It’s important to research the market and consider any additional costs like insurance, storage fees, and appraisals for these investments.
Precious Metals
- Investing in precious metals such as gold, silver, and platinum can help diversify a portfolio.
- While these investments do not generate income, they may be less volatile than stocks.
- The prices of precious metals can be affected by a number of factors including foreign currencies, global economic activity, and government policies.
- Depending on the holdings, precious metals can also be used as a hedge against inflation.
By considering investments beyond traditional stocks and bonds, investors can take advantage of opportunities that offer a higher return potential. With careful research and strategy building, alternative investments can help create a diversified portfolio and potentially increase returns.
2. What Are Alternative Investments?
Alternative investments offer a great way to diversify a portfolio and add exposure to unique assets. From venture capital to real estate, there are plenty of opportunities to gain exposure to different strategies in modern investing.
Venture Capital
Venture capital is the investment of money in startups in exchange for an equity stake. The goal of venture capital investments is to grow the portfolio by identifying companies with high potential to be successful in the long-term. This form of alternative investment comes with significant risk, but also presents a higher probability of a greater return.
Private Equity
Private equity investment involves a fund buying a portion of a company in exchange for direct control or influence over the business. Private equity investments require significant commitment since the fund has ownership of the company. There are a number of risks associated with private equity, but a successful fund can see returns greater than in the stock market.
Real Estate
Real estate has long been a popular vehicle for alternative investing. Common strategies include purchasing rental properties, flipping houses, and investing in REITs (Real Estate Investment Trusts). Real estate investments can be one of the most passive forms of alternative investments, with the potential for steady income. Careful research should always be undertaken however, to ensure the investment is worthwhile.
Hedge Funds
Hedge funds are a type of pooled investment vehicle, using derivatives, leverage, and other strategies to maximize potential returns. They generally cater to accredited investors and require sophisticated due diligence to determine if each investment is appropriate. Hedge funds are not suitable for all investors, but they can offer higher returns to investors who have the funds and the experience.
3. Strategies for Incorporating Alternatives into Your Investment Plan
When it comes to investing, there is no one-size-fits-all solution. With a variety of investment strategies on the market, it’s important to consider alternatives to help diversify your investment portfolio. Here, we’ve outlined three strategies that you can use to incorporate alternatives into your investment plan.
1. Look for Low Correlated Investment Opportunities
Finding investments that move in different directions is an excellent way to guard against market volatility. For instance, when stock prices fall, real estate prices may increase, and vice versa. Alternatives that offer low correlation can help insulate your investments from a bear market, while creating additional opportunities for growth.
2. Use Low-Cost Exchange Traded Funds (ETFs)
ETFs are investment vehicles that track indexes such as the NASDAQ or S&P 500. By investing in ETFs, you can gain exposure to non-traditional asset classes, such as commodities, or alternative investment structures such as companies in emerging markets. As a bonus, ETFs are cost-effective and typically require no minimum investment.
3. Heed the Advice of Professionals
When it comes to investing in alternatives, having guidance from financial advisors can be invaluable. Speak with a financial advisor to gain the insights and expertise you need to make informed decisions about incorporating alternatives into your portfolio. They can also help you create a comprehensive investment plan that factors in risk tolerance and life goals.
4. Putting Alternative Investments in Perspective
Alternative investments can be a great way to diversify your portfolio and potentially earn higher returns than traditional investments. But there can also be some risks involved that you’ll need to be aware of before jumping in.
One of the biggest considerations is the liquidity of your alternative investments. Many alternative investments are illiquid, meaning you can’t access your money as quickly. This can be a problem if you need to make an emergency withdrawal.
It can also be difficult to accurately assess the value of an alternative investment, as most lack a transparent pricing mechanism. This means you could end up paying more than you intended for an investment, or with a value that is poised to drop.
Fees are another potential issue, as they can often take a significant bite out of any returns you might make on your investment. Be sure to ask about the fees associated with any alternative investments to help weigh the pros and cons.
Stay diversified to help minimize the risks associated with alternative investments. It’s often a good idea to keep the portion of your portfolio invested in alternatives to a maximum of 20%. By diversifying your investments, you can spread out the risk and potentially benefit from alternative investments’ higher returns.
- Understand your liquidity options before investing
- Be aware of valuations and assess potential price changes
- Understand the fees associated with the investment
- Diversify your portfolio to spread out the risk
In conclusion, alternative investments can provide unique opportunities and added diversification to your portfolio. If you are looking to move beyond stocks and bonds, there are many options out there which can meet your needs and give you the potential to benefit from investing. Start your journey to a more diverse portfolio today!