Alternative Investments: Exploring Options Beyond Stocks and Bonds

By many standards, stocks and bonds are the staples of a diversified investment portfolio. However, as markets change and investors look for additional ways to diversify their portfolios at greater potential returns, alternative investments have become more popular. This is your ultimate guide to alternative investments which will cover other viable options beyond traditional stocks and bonds, what makes them great opportunities for you as an investor, and the unique challenges associated with it.

What Are Alternative Investments?

From an income perspective, alternative investments are broadly defined as assets other than stocks, bonds, and cash. Moreover, these investment options come with a low correlation to traditional market-based investments leading to the benefits of diversification and unique return generator profiles.

Types of Alternative Investments

1. Real Estate

A popular alternative investment has been real estate for many years. It includes:

Residential property: Single-family residences, multi-family units

Office buildings, retail space, warehouses (commercial real estate)

Real Estate Investment Trusts (REIT): Public companies that own, develop, and manage commercial real estate properties.

Owning real estate can potentially offer an income stream through rent payments, as well as capital appreciation without a set time frame. But it also carries some management duties and can be illiquid compared to other investments.

2. Private Equity

Private Equity Investment in private companies or buyouts of Public Companies This can include:

Venture Capital (VC): investment in startups and early-stage companies;

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While it has the potential for high returns, private equity usually comes with steep minimum investments and lock-up periods.

3. Hedge Funds

Hedge funds hedge their investments with one of several more advanced strategies, but the most common are:

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Long/short equity

Global macro trading

Event-driven strategies

Highly Leverage: These funds seek to grow significantly from any market conditions, but typically require high fees and investment minimums.

4. Commodities

Physical goods are commodities such as:

Precious Metal: Gold, Silver & Platinum

Energy: Oil, natural gas

Major Crops: wheat, corn; livestock

Futures contracts, ETFs, and owning the physical commodities themselves are all ways for investors to have exposure to harder assets. Commodities are considered a hedge against inflation, but they can also be highly volatile.

5. Cryptocurrencies

A lot of new hyped around Digital currencies being the new Asset Class equating to Bitcoin or Ethereum. While they have the potential to deliver extraordinary gains, as capital enters and the digital universe becomes feathered in rainbows of holistic wonder – (very) concomitant is its great volatility accompanied by regulatory murmurings.

6. Collectibles

There is a wide variety of things that can be considered collectibles.

Fine art

Rare wines

Vintage cars

Stamps and coins

These are passion investments but they can also enjoy value over the years. But they can be difficult to evaluate and illiquid.

7. Peer-to-Peer Lending

P2P lending involves individuals (or small businesses) lending directly to other individuals – often earning these latter investors higher rates of return than more traditional fixed-income investments.

Potential Benefits of Alternative Investments

Diversification: Alternative investments are frequently lowly correlated to traditional assets, thus offering useful diversification away from more mainstream holdings.

Higher return potential: In a low-yield environment, some alternative investments may produce higher returns than traditional stock and bond markets.

Hedge against inflation: There are some alternatives, like real estate and commodities, that can be a hedge to the increase in prices.

Income generation: alternative investments can offer regular income streams in many instances.

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Diversification: Alternatives offer greater exposure to nontraditional asset classes such as niche markets or strategies that are not accessible through mainstream investments.

Risks and Considerations

While the potential upside for alternative investments might be higher, they are also often subject to risks not faced by mainstream instruments.

Illiquid Investments: A large number of alternative investments cannot be easily sold or converted into cash.

Complexity – Alternative investments require more complex strategies or assets that can be hard to understand and value.

Higher costs: Alternative investments generally carry greater fees than traditional funds, in part because of management and performance levies.

They can do this by actively hiding what they are holding (eg: hedge funds) or how much of something they are even doing at all.

This finally leads to increased risks of something called “regulatory risk”: the fact that some alternatives may be subjected to changing regulations… with all sorts of results regarding their viability and performance.

Market risks: Just because alternatives have low correlations with traditional markets doesn’t mean they are insulated from economic downturns or market crashes.

That said, few people can actually afford alternative investments due to the high minimum investment.

How to Incorporate Alternatives into Your Portfolio

Bear in mind these factors when pondering alternative investments:

Know What You Are Buying Into: Make sure to properly research and understand any alternative investments you may be interested in before investing.

Review your Goals: Confirm the alternative is in line with your investment goals, tolerance for risk, and time frame.

Start small: For those who are new to alternatives, we recommend starting with a low allocation that you slowly increase over time as investors become more comfortable.

Balance: Alternatives are meant to be a complement, not the main course. It is often suggested that you invest no more than 10-20% alternatives in your portfolio.

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Get guidance from pros: With some alternative investments, a financial adviser can help sort out the details about just what you are investing in.

Warren Buffet once said ” No matter how great the talent or efforts, some things just take time.

The Role of Technology in Alternative Investments

Fintech innovations are making certain alternative investments available to a more diverse set of investors:

For instance, crowdfunding platforms let smaller investors get into real estate deals or private equity investments.

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The future has never looked brighter: blockchain tech opened up entirely new investment areas such as tokenized real estate and fractional ownership to the unregulated world.

Conclusion

There are many alternative investments on offer besides conventional stocks and bonds. They offer diversification, the potential for enhanced returns, and access to differentiated asset classes and strategies. But they also have their risks and complications.

Like all investment choices, it is essential to conduct the proper research and have a clear understanding of alternative assets before integrating them into your portfolio. Alternatives can have a place in your portfolio but be careful and ideally consult someone on the financial side.WriteHeader

As financial markets become more sophisticated, and technology makes it easier to access these alternatives the likelihood that these investments will have an increased place in both individual and institutional portfolios grows. Research your options, stay well-informed, and above all, make sure you know what the implications are – or may be – of choosing to invest some portion of your hard-earned relying such investments.

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