When you think about investment options, the first things that may come to mind are the traditional ones like stocks, bonds, and pooled funds.
Though popular, these aren’t your only choices as an investor. Those who aim to broaden their horizons may want to consider the possibilities offered by alternative investments.
However, with unique features and risks to consider, diving into these “unconventional” investments should be done with care. Learn all about them below.
What makes alternative investments unique?
Alternative investments can include any financial asset that falls outside the traditional investment categories of stocks, bonds, and cash and cash equivalents.
There are no universal standards for defining alternative assets, and so they can cover many things. Here are a few examples:
- Tangible properties like real estate, precious metals, art, and collectibles
- Relatively new investment vehicles like digital assets and online peer-to-peer lending
- Investments that require significantly large capital and tend to be exclusive like private equity, venture capital, and hedge funds
What sets them apart from traditional investments is that they tend to be more complex, hard to find, and sometimes out of reach for individual or retail investors. Their unique characteristics may bring both benefits and downsides.
What are the potential benefits of alternative investments?
1. Diversification
Alternative investments may have low or negative correlations with traditional assets. This means their performance might not be in sync with the stock or bond markets.
If you invest in these products also, you can potentially protect your portfolio from risks associated with the traditional markets. Done right, this might improve your overall returns.
2. Potential for higher returns
Since they tend to come with a higher degree of risk, alternative assets often offer comparatively higher potential returns.
For example, investing in a startup via venture capital can be risky because of the possibility that the business will fail. However, it can bring huge profits if the company succeeds.
With a wide array of alternative options to choose from, you may be able to find a product that matches your risk profile.
3. Novelty and practical use
The advantages of alternative investments can go beyond monetary benefits. Real property like a house can provide a place to live in if you don’t plan on selling it or renting it out right away.
Some alternative assets like art or rare collectibles also allow you to put money in things you’re passionate about.
You may choose to buy these items because owning them brings you joy. Any possible appreciation in value would simply be a bonus.
What are the potential disadvantages of alternative investments?
1. High minimum investment
You’ll likely need huge sums of money and a high income to invest in companies via private equity or venture capital.
These involve funding companies that are not listed on the stock exchange, and such methods are typically not created with retail investors in mind.
Even assets like real properties and works of art can be a lot more expensive than shares of a publicly-traded company’s stock.
2. Low liquidity
You may need to hold on to an alternative investment for a long time before realizing returns. If you need money quickly, it can be harder to sell non-traditional assets for the price that you want.
3. Harder to valuate
Identifying a fair price for alternative investments can be complex. Some types may quickly rise and fall in value due to unpredictable factors.
For example, pieces of art or collectors’ items may grow or shrink in popularity over time as tastes and trends change.
With public companies, you get to assess how much they’re worth through earnings reports. Alternative assets rarely offer the same amount of information.
With little insight, it can be challenging to determine the real worth of a product. Some might have no intrinsic value at all especially if their prices are heavily swayed by speculation.
4. Lack of regulation
Most alternative investments are less regulated compared to publicly-traded securities. The lack of oversight may expose investors to legal issues and even scams.
Keep in mind that the possible risks and rewards may vary per asset type. When choosing where to invest your money, it helps to know the available options out there, whether they’re traditional or otherwise.
This may allow you to pick which ones suit you best given your investing goals and situation. They also offer a look at what you can consider in the future once your investing skills and financial capacity have improved.
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