In the past, many investors found that their only options were assets such as stocks, bonds, and cash, which were typically obtained through the long/short or arbitrage strategies.
However, today there are plenty of different options; alternative investments have been gaining traction in the last few years, and for good reason.
Individuals and institutions who are looking to diversify their portfolios, reduce risk, and enhance returns have been turning to alternative investments.
Alternative investments are a great idea for those with a specialty knowledge in a specific area or high net worth families that can benefit from certain tax offsets.
What Is an Alternative Investment?
To fully look at and appreciate how alternative investments are defined it’s important to first look at the two terms: asset classes and asset allocation.
An asset class is a type of asset with a particular set of similar characteristics (think how it produces a return or the risks that come with holding it).
Asset allocation is the planning of a rough percentage of a portfolio an investor wishes to have in each asset class.
Typically an asset allocation will be detailed in a document called an investment policy statement.
What are Examples of Alternative Investments?
Alternative investments range from investing in the timber industry to beauty school, but there are a handful of ones you are more likely to encounter, such as:
- Real estate and its derivations
- Mineral rights
- Arts and collectibles
- Equipment leasing
- Peer-to-peer lending
- Tax credits
- Commodities, including precious metals like gold, silver, or platinum, as well as natural gas, corn, soybeans, live cattle, copper, zinc, etc.
Why Do Investors Seek Alternative Investments?
There are various reasons why someone would choose to add alternative assets to their portfolio.
For example, cash flow from these investments may generate a more favorable tax treatment, or maybe the investor or their advisor has a specific knowledge/skill set.
Another common reason is that the specific factors and conditions of the asset class at the time of investment may make the asset appear much cheaper, thus more attractive to the investor.
Whatever the reason is for investing in alternative assets, the benefits are countless.
What are the Benefits?
Benefits vary from advantageous cash flows to intellectual satisfaction. Some of the other perks include:
- Defense against market instability
- Lower transaction costs
- Potential for diversification
- Tax benefits
If you are knowledgeable, patient, and looking to diversify then alternative investments may be right for you.
What are the Disadvantages?
Looking at the flip side, you can see that there are some hidden risks and complications when it comes to alternative investments.
Sometimes investors find that there is a lack of transparency which makes it difficult to spot the risks you’re taking.
However, if you have a healthy fear and remember that you can walk away from an investment you don’t fully understand, you will be fine.
Are Alternative Investments for You?
As your net worth grows you should consider mixing up your portfolio; a diverse portfolio is a lucrative one. Alternatives aren’t meant to replace your portfolio but enhance it.
If you’re ready to learn more, then give us a call!