Alternative investments are becoming more and more available to everyone, but it’s important that individual investors understand how these types of investments work. Alternative assets usually have lower regulation with greater potential returns than the more regulated ones.
Every asset class has its own benefits. However, investors need to be careful in doing their research and they should also seek advice from professionals before investing in a particular asset class.
Diversification
By spreading out your investments across various asset classes, industries, and maturities, you can reduce the risk of losing it. When one investment class experiences a downturn, other classes in your portfolio won’t be as affected. Additionally, diversifying may increase the probability that favorable news about one company or group of companies can benefit your entire portfolio.
When it comes to diversifying an asset class you can invest stocks with differing sizes (small, mid and large), sectors (technology, consumer goods and healthcare) and geographic locations (domestic and international). You’d be able to further diversify by choosing bonds issued by federal, state and local governments. And corporations with various credit ratings or even selecting bonds issued directly by them.
Other alternatives to traditional investments that help diversify portfolios include real estate through real estate investment trusts, commodities such as natural resources and precious metals – which are common so they’re easy to find – debt such as unsecured credit and mortgage-backed securities.
Low Correlation on Stocks & Bonds
As time goes on stocks have generally been proven better than bonds when it comes to returns; however over the past decade their returns have become closer due to investors responding to the Federal Reserve’s low-interest rate policy. Therefore looking into investment options with low correlations with stocks or bonds such as real estate investment trusts (REITs), private equity or commodities can help improve portfolio diversification; each has their own risks too.
Correlation is simply measuring how similar two things are within a period of time. When one goes up and the other one goes down, their correlation might become negative and vice versa; this further reduces volatility and drawdown in your portfolio while potentially providing inflationary protection and improving risk-adjusted returns.
Higher Returns
While stocks and bonds are more conventional assets that are proven to work, alternative investments have unique opportunities that can give you higher returns; however these investments do usually carry greater risks too.
Accredited investors looking for increased returns may want to allocate part of their portfolio towards alternative assets but this decision must be carefully assessed based on investment goals and risk tolerance.
Alternative assets may also offer tax benefits such as 1031 exchanges and opportunity zones that could help offset their higher investment risks. These features could help to balance out their potential higher risks.
Since it’s not traded on public markets, alternative investments may be harder to liquidate when needed – leading to more difficult as well as higher fees & charges like management & performance fees than more liquid investments. Furthermore, illiquidity could increase costs even further as you’re often required to pay more when investing through them compared with other financial counterparts.
Flexibility
When the market is low, alternative asset investments add diversity and stability – which means they provide greater protection from downturns in the economy. They’re low in correlations when compared with traditional securities like stocks and bonds.
There’s always a way to reach your goals. Whether you’re on the hunt for funding to launch your tech startup or just looking to make it into real estate, an investment provider is out there for you. The problem is finding one that fits all of your needs — so it’s best to get educated in each asset class before making any decisions.
However, some types of investments have longer lock-up periods. This means it could be a while before you can access them or convert them into more liquid forms of investment, which could be bad news if you’re hoping for short-term gains from those investments. But worry not: A trusted provider can help you navigate these sticky situations with best practices and transparency. They’ll also offer trackers to monitor performance and give you an overall idea of what to expect from alternative investing.
