Alternative investments are generally considered investments in asset classes that don’t fall into the conventional asset classes like stocks, bonds, or cash. There are multiple alternative investments that people choose from; which can be in the form of art or even in precious metals and even real estate investment. With time, an increased number of investors are shifting towards alternatives to boost returns, provide diversification from traditional investments, and move towards achieving their goals.
What’s the Difference Between Traditional Investments And Alternative Investments?
Traditional investments make use of strategies that are constructed primarily by utilizing public stocks and bonds. Most of these assets are available in the public market and are traded extensively.
With stocks and bonds, there’s also a high level of pricing transparency. Meaning that you get bond ownership at almost the same price as everyone else.
With alternative investments, things are different since homes in the same area can be sold at completely different prices depending on the agreement reached by the buyer and the seller.
People like having multiple streams of income. Some even like making their own financial investment. You have many options; whether you’re going traditional or alternative.
Things have changed with the internet. We have more control of what and how we want to invest. It’s a great time to make money.
Traditional investments are also highly correlated with market movements and shifts. There’s a high sell behavior with many investors immediately selling their holdings in case of a market decline. Most traditional investment returns are also primarily driven by beta with a lower rate of dispersion amongst investors.
High Level of Liquidity
Between traditional investments and alternative investments, there’s also a difference in liquidity. Traditional investments like stocks and bonds afford investors a high level of liquidity. This is compared to alternative investments where it might take months to strike an effective deal with an interested buyer.
There’s also a low correlation; the price of one painting doesn’t fall if a similar painting goes through a demand shortage. In most cases, prices of paintings or real estate go down only in damage of some sort.
There’s also the risk of assets turning illiquid in alternative investments. Therefore, careful investment decisions need to be taken every time you make any type of alternative investment. Most alternative investments are made to exploit or take advantage of market inefficiencies.
Are Alternative Investments Worth It?
Most alternative investment assets are the ones that are held by institutional investors or even by high net worth individuals because of their complex nature. There’s also a high barrier to entry because most alternative investments require a high minimum investment and a high fee structure.
They seem to be exceptionally high compared to stock investments or compared to exchange-traded funds. Most alternative investments have less opportunity to publish their verifiable performance data and advertise to their potential investors.
The majority of investors will find it harder to sell a 90-year-old painting but selling a thousand shares of any stock would be much easier and something that could be done in hours.
Alternative investments are also highly prone to scams and investment fraud due to their unregulated nature. It is also harder to evaluate a price for an alternative investment, which is why only knowledgeable individuals engage in such investments.
What Are The Benefits Of Alternative Investments?
While alternative investments might be considered risky investment overall, they are a good way to diversify your portfolio and reduce your exposure to the stock market.
Most alternative investments aren’t too risky either, and you can invest in a couple of low-risk investments like antiques, wine, and paintings, which can work around helping you generate passive income.
Another alternative investment benefit is that you can invest in them using your retirement accounts or through your IRA accounts. IRA accounts can help you avail tax benefits and also tax deductions.
Many high net worth individuals engage in alternative investments to bring down the total taxable income. And while the alternative investment helps deduct the amount of tax being paid in the form of tax deductions and tax credit, it can also be a source of passive revenue if the investor decides to hold the asset for a longer time.
Most people also send some of their revenues towards startups and firms they believe will create a positive societal impact. In some cases, alternative investments can be a great way through which people can make philanthropic investments.
Another benefit that alternative investments bring is that most alternative investment funds require active management. Most alternative investment funds have complex volatility traits. They’re generally complex assets to invest in. To truly make use of alternative investments, high-level management strategies need to be deployed. And some wealthy investors like to reap the benefits of high-end expertise.
What Are the Four Main Types of Investment Alternatives?
There are four main types of alternative investments. So what are they?
- Private equity
- Real estate
There’s an equity market that is available to high-net-worth individuals or private investors. Private Equity refers to funds that institutional investors or high net worth individuals place in private companies. They can also refer to funds that investors place in due to the buyout of public companies. These private companies utilize the capital available for inorganic and organic growth.
Most investors also lack the expertise to select companies that suit their investment goals. Therefore, many investors prefer making alternative investments through the private equity channel; rather than the direct channel.
Hedge funds are well known but less reached towards alternative investment measures. They cater to investors that have deep pockets. As per most US laws, hedge funds should only cater to accredited investors.
To qualify for an accredited network, they need to have a net worth of more than $1 million. And they also need to have a minimum annual income.
Hedge funds have a minimal co-relation to equity markets; most hedge funds have diverted portfolio risks and reduce volatility.
Hedge funds aren’t as regulated as mutual funds, and these funds also have leeway to invest in a broader range of securities.
Most hedge fund investments are in risky assets and derivatives, and hedge funds also prefer taking a high-end complex approach calibrated to various levels of risk and return. One factor that separates hedge funds from other investments is their liquidity quotient. These funds can all be sold in seconds because of their high exposure to liquid securities.
Investing money into tangible assets has been there for centuries. Real estate is the world’s biggest asset class. In fact, many people work their entire lives to own a piece of land that they can call their own. And it’s one of the most recognizable alternative investments.
Property owners can receive cash payments through tenants paying rent. Property values are also known to appreciate instead of depreciating. To become a successful real estate investor, it’s essential to develop strong valuation skills. Then understand when and how to use various methods. Real estate investors have to use different metrics like discounted cash flow, income capitalization, and sales comparable.
Another alternative investment type is commodity investments. Commodities are real assets, and they’re mostly natural resources like agricultural products, natural gas, and precious and industrial metals. Most commodities are considered a hedge against inflation and are not sensitive to public equity markets.
Commodity value is greatly influenced by supply and demand discrepancies; higher demand for a certain commodity causes the price to shoot up, ultimately resulting in investor profit. Commodity trading, like real estate trading, has been around for thousands of years, and the market is expected to continually thrive in the coming years.
Collectible items are tangible items like paintings, rare artifacts, and even antique cars. This is another source of alternative investment as investors collect and purchase physical items hoping that the value of assets will appreciate over time. Remember all those old comic books you had as a kid that your mom threw out? What are they worth today? Looking ahead at what is hot now, but will be rare tomorrow is another way to invest for the future.
Alternative Investments Final Thoughts
If you want some ideas to invest in something other than stocks, you have options. There’s more than one way to make money in the world, and not just in a bull market. You can make money shorting stock for example. The bottom line is, many people are discovering there are other methods to grow yield. You know longer have to work 9-5. You can trade, own real estate. precious metals, etc. If you’re going to invest in anything, make sure it’s a solid one. The more solid investments you have, the better off you’ll be in the future. Looking for a future IPO to invest in? Check out TikTok Stock.