When women often think about investing in something, typically the more well-known assets such as stocks, bonds and property come to mind. But there’s a whole different class of assets out there – and they’re called alternative investments. Once reserved for high-net-worth investors, alternative investments are gaining popularity and more readily available to mainstream investors.
Does that mean you should invest in alternative investments? It depends on your situation. If you understand what they are, their pros and cons, and how they fit into your goals, you’ll be in a position to make savvier decisions when it comes to investing in them.
Why Alternative Investments?
I’ve written and talked a lot about the importance of diversification when building an investment portfolio. Alternative investments typically have a low correlation to traditional assets like bonds and stocks, and therefore can help further reduce risk while still providing the potential for higher returns. There are some that also provide tax benefits that are not always available with traditional assets like stocks. This matters in certain countries where investment income is taxed.
Examples of Alternative Investments
Cryptocurrencies have been making headlines of late and is one of the more commonly known alternatives but there are many more.
Examples include hedge funds, venture capital, private loans, private equity, limited partnerships, real estate and its many derivations such as REITs, farmland, wine, art and commodities such as gold, silver, coffee, wheat etc.
The Risks
Alternatives are not without risks just like any investment. The potential for higher returns also means greater volatility. These types of assets often have complex structures that come with higher fees and the need to take more time in understanding how they work.
Many alternatives are also less liquid meaning they don’t have a readily available market for buyers and sellers. Exiting these investments can be difficult, and determining a “market” price can also be tough.
How to Buy Alternatives
As mentioned, alternatives have become more readily available to retail investors. Some are traded through the form of mutual funds and exchange-traded funds (ETFs). Some are available directly from the sponsor of the investment. Most however, are privately held and offered through financial institutions to only accredited and qualified investors. And of course there are specific dealers and established networks for wine and art which you need to source.
Considerations Before Buying
Given the inherent risk that comes with alternatives, it’s important to due your due diligence before diving in. The illiquid nature of some means you need to ensure you understand the terms around holding them and exiting. If you’re needing liquidity, alternatives are likely not for you. Finding the right type of investment for your needs (holding period, risk, tax implications) takes some homework so make sure the sponsor or advisor can answer your questions and provide the relevant information.
In summary, alternatives have their advantages in particular when it comes to diversifying. They range from being fairly simple and liquid to being complex and illiquid. If you’re fairly new to the investing world, consider building your core portfolio with mainstream assets before dabbling in alternatives. If you’re still keen to gain exposure, do your homework or make sure anyone recommending alternatives can provide you with the complete picture.