March 29, 2021
When you think of investing, stocks, bonds and exchange-traded funds (ETFs) are some of the traditional types of assets that come to mind. That’s because they’re usually the bread and butter of a basic, diversified portfolio.
But there’s another world out there when it comes to investing.
Beyond the traditional assets that we often read about lies the world of alternative investments. (Cue the grunge music.)
As the name implies, an alternative investment is a type of financial asset that falls outside of the traditional investment categories of stocks, bonds and cash. Private equity, hedge funds and collectibles (you know, the finer things in life such as art and wine) are just a few common examples of alternative investments.
Despite their level of risk and complexity, alternative investments can be appealing to some investors.
Because they’re unconventional (and often high-risk), alternative investments are typically held by institutional investors and high-net-worth individuals. But that doesn’t mean they’re completely out of reach for regular individual investors.
Access to these investments is gradually expanding. And interest among mainstream investors is on the rise. That’s because for some investors, alternative investments provide the potential opportunity to further diversify their portfolios, boost returns and look beyond the stock markets to build wealth.
In this article, we’ll go over the basics of alternative investments and run through some common examples you may see as you explore this nontraditional side of investing.
Sometimes you’ll see alternative investments referred to simply as “alternatives” or “alt investments.” (See, we’re hip.)
Now, the list of alternatives is long and varied. And while we can’t cover them all here, we can start with a quick look at the five common types of alternative investments.
You can see just how broad the alternative investments category can be. One important thing to keep in mind is that each type of alternative comes with its own level of risk and complexity – as well as investment considerations (how they’re traded and valued, their accessibility, liquidity, fees, costs, etc.).
So for example, the approach you might take to investing in fine art will likely be different from how you invest in, say, a hedge fund. Whatever asset you may be considering, know that investing in alternatives generally requires a lot of research and due diligence. In other words, expect to do some homework.
All that being said, alternative investments do share a few general characteristics.
Let’s use a piece of artwork as an example. It’s relatively illiquid, compared to a traditional asset like stocks, because it may take some time for you to find a buyer. It can also be difficult to judge an artwork’s value. To find out, you usually have to take the piece to appraisers. And you’ll probably run into some disagreements there. After all, what is…art? Compare this to a stock, whose price you can look up online almost anytime.
At this point, you may be wondering why people bother with alternative investments. After all, they’re relatively illiquid, largely unregulated and complex – or in fewer words, high-risk. (And they sound like a lot of work!)
Some people see alternative investments as a way to hedge against inflation and build wealth outside of the traditional financial markets.
The opportunity for diversification and higher returns is also appealing to some investors.
Because of the level of risk and complexity, for a long time, access to alternative investments was limited to institutional investors and accredited investors. In other words, investors with a lot of money. To give you an idea, an accredited investor is someone who earned more than $200,000 in annual income for the past two years or has a net worth of more than $1 million.
If you’re thinking about making a move to alternative investments, it’s a good idea to talk to a financial advisor before getting started.
But in recent years, growing interest in alternative investments has made it possible for regular individual investors to invest in certain alternatives.
For example, there are alternative mutual funds (aka “alt funds” or “liquid alts”) that invest in non-traditional assets like real estate and commodities. While many types of alternative assets aren’t regulated, alt funds are publicly traded and registered with the SEC.
The world of alternative investment is a big one. It comes with a long and varied list of non-traditional assets and investment strategies to consider. Despite their level of risk and complexity, alternative investments can be appealing, as they offer the opportunity for some investors to further diversify their portfolios, try out new investment markets and potentially score high returns.
But due to their high-risk profile and generally high investment costs, investing in alternatives isn’t for everyone. So if you’re thinking about making a move, it’s a good idea to talk to a financial advisor before getting started.
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