A Short Guide to Alternative Investments
Investors are always looking for ways to diversify their portfolios. Putting all of your eggs in one basket can lead to a total loss, especially when it comes to stocks. Even if you are a novice investor just starting out, diversifying your portfolio should be at the top of your to-do list. In this blog, we’ll cover the basics of alternative investments, including the pros and cons of adding these financial assets to your portfolio.
What are Alternative Investments?
Alternative investments are financial assets outside of traditional investment avenues, which include stocks, bonds, and cash. Common types of alternative investments include gold, hedge funds, art, antiques, wine, derivatives, real estate, cryptocurrency, and any other type of commodity or collectible.
Certain alternative investments, like hedge funds, managed futures, and private equity can be reserved for accredited investors who have a high net worth and disposable cash. However, there are ways that you can begin diversifying your portfolio, even with a small investment, such as through EFTs and brokers.
What are the Benefits of Alternative Investments?
There are numerous benefits to adding alternative investments to your portfolio. For one, these investments help diversify your portfolio. If your portfolio only includes blue-chip stocks, what happens when there is a recession? Odds are most publicly traded businesses will be affected, decreasing your overall portfolio value. On the contrary, many alternative investments aren’t subject to market swings, helping you preserve your portfolio’s value and hedge against inflation.
Furthermore, alternative investments have fewer regulations compared to traditional publicly traded stock. For example, cryptocurrency operates on a decentralized ledger with minimal government interference. This can be a great option if you are looking to avoid complex regulations when buying and selling assets.
Alternative investments can give you the ability to secure higher returns compared to stocks and bonds, especially if you enter a niche industry before rapid growth. Take the cannabis industry. This industry is booming, with an average of 34.3% return on inflation, which significantly outpaces the average 10% return in the stock market.
The Cons of Alternative Investments
Despite the benefits of alternative investments, there are some cons to be aware of as well. First, some alternative investments are illiquid, meaning they aren’t easy to sell. Think of a brick of gold. How many buyers will readily hand over cash on the spot? Unless you go to a pawn shop and sell the gold for less than it’s worth, you might need to hold onto the investment until you find the right buyer.
Additionally, alternative investments come with a higher degree of risk. There’s no guarantee that your 100-year-old bottle of wine will hold its value over the next decade. Moreover, there is less transparency when searching for alternative investments, as data is scarce. This can make it difficult to evaluate the potential return on your investment.
Finding Your Next Investment
Adding alternative investments to a portfolio isn’t for everyone, especially as certain investment avenues can be complex. However, hedging against inflation, seeing higher returns, and reducing government intervention are all benefits that come from holding alternative investments. For more investing tips, tricks, and information, check out our other blog posts.
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