What are alternative investments
Alternative investments are asset classes that generally don’t move together with traditional equity and fixed income markets. They usually follow their own cycles. As a result, alternative asset classes have a low correlation with standard asset classes; therefore they may help diversify your portfolio by reducing the overall volatility of the portfolio when traditional asset classes such as stocks and bonds are performing poorly.
Historically, alternative investments have been restricted to high-net worth individuals and institutional investors, but these days they are far more available to a wider audience. Alternative investments range from real estate to hedge funds to commodities and can complement a variety of investing strategies. However, they are designed to complement a well-founded portfolio rather than to serve as the focal point of the portfolio.
Most people are attracted to alternative investment because they may yield a higher return than traditional investments, but note that potentially higher returns also may carry higher risks with them. What’s important to note is that alternative investments may be more illiquid than their conventional counterparts – they cannot be sold readily like stocks and bonds – and some may need to be held for a longer time horizon. Additionally, there may be unique fees or tax consequences.
Including a small portion of your portfolio toward precious metals such as gold or silver may offset the performance of other assets in the portfolio such as stocks and bonds, because precious metals typically don’t move in tandem with conventional investments.
Gold is typically viewed as a hedge against inflation and currency fluctuations. So when inflation effects the purchasing power of a currency – say the dollar weakens against the euro – gold prices tend to rise. As a result, investors place their money in gold during economic and market downturns.
Investing in gold can be accomplished in several ways, including futures funds, exchange-traded funds, mutual funds, bars, and coins. Nevertheless, since precious metals make up a small sector, prices often change dramatically. This type of volatility can create opportunities for investors in the form of high returns but it can equally result in dramatic losses.
Real estate investment trusts
A popular type of alternative investment is commercial real estate. Until recently commercial real estate has been mostly inaccessible to retail investors and was widely enjoyed by high-net-worth individuals and institutional investors for its potentially higher yields and diversification attributes. Since the inception of real estate investment trusts (REITs), investing in commercial real estate has become available to wider range of investors.
REITs pool money from investors and invest the funds in properties ranging from office buildings to apartment complexes to hospitals and warehouses. REITs are offered to investors in two forms: traded and non-traded. Both offer exposure to commercial real estate assets.
Publicly traded REITs can be easily bought and sold on a daily basis on active secondary market. However, they tend to be more volatile.
Non-traded REITs are illiquid investments appropriate for investors with a long-term investment time horizon of at least 5 to 10 years. Non-traded REITs are not aligned with stock and bond market movements so they add great diversification to a portfolio.
Alternative investment can also include assets such as art, gems, rare collectibles, and antiques. In addition, venture-capital funds are considered alternative investments. These alternative investments can help provide investors with added diversification and can help balance out performance across various market swings.