Investing is an important element of personal finance but it can be confusing to know where to start. The market is vast and it is difficult to pick the right investment option. One of the trends in recent years has been the rise of alternative investments. Unlike traditional investing, alternative investments offer tangible assets and distinct benefits. It is important to understand the concept of alternative investing before deciding to invest. In this blog post, we will cover different aspects of Alternative Investing become smarter investor by paving the way for you to invest in a variety of asset classes.
What are alternative investments?
Alternative investments are those that go beyond the traditional stocks, mutual funds or bonds. They typically include tangible assets such as real estate, precious metals, commodities, art, and collectibles, etc. Alternative investments come with distinct advantages. They offer investors greater portfolio diversification and potentially higher returns. Furthermore, they have lower correlation to the stock market which means that they are less vulnerable to market volatility. However, alternative investments require more research and are generally aimed at experienced investors as they tend to be riskier than traditional investments.
Types of Alternative Investments
Real estate is by far the most popular type of alternative investment in the market. It comprises of mainstream assets like commercial and residential properties, REITs, and investment properties. Another popular form of an alternative investment is precious metals including gold, silver, platinum, and palladium. These are tangible assets that have long been considered a safe haven in times of financial uncertainty. Investing in commodities is another popular alternative. Commodities such as corn, wheat, oil, and gas are tangible assets that have value because they are consumed every day. Artworks and collectibles can also provide attractive alternative investment opportunities.
Benefits of Alternative Investments
The benefits of alternative investments are vast when compared to traditional investments. The biggest perk is portfolio diversification. By investing in various asset classes, a portfolio becomes less vulnerable to stock market volatility. In addition to diversification, alternative investments can offer better returns on investment. For example, in 2O19, the price of gold increased by over 20% against 13.5% returns offered by the S&P 500 Index. Another benefit of alternative investments is that they tend to be less sensitive to interest rate changes, which makes them a great hedge against inflation.
Risks of Alternative Investments
Alternative investments do come with risk. These assets can be illiquid and difficult to sell in a downturn. Also, some alternative investments have high fees associated with them. Private equity investments, for example, often require large initial investment amounts and have long holding periods. Another factor that contributes to additional risk is the lack of transparency and control. Since alternative investments usually operate outside the public markets, investors have less access to timely information about the asset and the industry.
How to Invest in Alternative Investments
Investing in alternative investments usually requires partnering with a firm that has experience in the asset class you are interested in. These firms will handle any legal, regulatory, and tax complexities. It is important to research a firm before investing with them. You should consider their track record, fees, investment style, etc. Another way to invest in alternative assets is to buy publicly-traded firms that operate in that particular asset class. For example, instead of buying a physical gold bar, one can buy shares in a gold mining company.
Alternative investments are becoming increasingly popular among investors seeking a diversified portfolio. These investments have distinct benefits including better returns, portfolio diversification, and decreased volatility. However, they do come with risks such as lack of transparency, illiquidity, and high fees. It is important to research and choose the right asset class and firm before investing in alternative investments. By adding alternative investments to your portfolio, you will be able to mitigate market volatility and earn higher returns. Remember, investing is all about taking calculated risks. Do your research, ask questions, and become a smarter investor.