Have you ever wondered what alternative investments are and how they could impact your financial portfolio? In a world where traditional stocks and bonds often dominate investment conversations, alternative investments offer a unique avenue for diversifying your assets. These unconventional options have gained traction among investors as 21^st century technology has allowed us to invest in an ever-expanding field of investments.

This guide will walk you through the types of alternative investments available, shedding light on their potential benefits and risks.

Types of Alternative Investments

Alternative investments encompass a diverse range of assets that fall outside the traditional realm of stocks and bonds. We will touch upon four types of alternative investments, however there are plenty more. Like traditional investments the following alternatives could provide capital appreciation and income.

Real Estate

Real estate investments can take various forms, including direct ownership of residential or commercial properties, real estate investment trusts (REITs), or buy-to-let schemes.

Owning property can be enticing as a physical asset, yet it comes with high maintenance costs and extra layers of taxes to understand.

Commodities

Commodities, such as gold, silver, oil, and agricultural products, are tangible goods with real-world uses. You can gain exposure to commodities through physical ownership or by investing in commodity derivatives like futures or swaps.

Be aware, physical ownership of gold and silver can be complex and costly to store whilst investing in derivates is very intricate to understand.

Cryptocurrency

The emergence of digital currencies, like Bitcoin and Ethereum, has introduced cryptocurrency as an alternative investment option.

However, the cryptocurrency market is highly volatile and subject to regulatory uncertainties.

Art & Collectibles

Art, cars, wine, postal stamps, sports memorabilia, entertainment memorabilia, high-end watches, and other collectibles can serve as alternative investments. These items may appreciate in value over time, however, investing in collectibles requires extensive knowledge and research to assess their value, condition, and authenticity. A popular rationale for collectibles is because you enjoy collecting them!

Collectibles are typically physical assets; they don’t generate any income. The risks with alternatives such as illiquidity, volatility, and the requirement for specialised knowledge come with the need to thoroughly understand the risks and conduct due diligence before allocating funds to alternative investments.

 

Benefits and Risks of Alternative Investments

Alternative investments offer several potential benefits that can enhance your portfolio’s performance and diversification. However, they also come with unique risks that you should carefully consider.

As with any investment, conducting thorough due diligence and aligning your choices with your financial goals and risk tolerance is essential.

Portfolio Diversification

One of the key advantages of alternative investments is their potential ability to provide portfolio diversification. These assets often have low or negative correlation with traditional investments like stocks and bonds, which may help reduce your overall portfolio volatility.

Lower Liquidity

Liquidity means the ability to convert an asset or security into cash. Many alternative investments have lower liquidity compared to traditional assets. This means you may face restrictions when it comes to selling your assets or be required to hold your investments for an extended period.

For example. Imagine the timeline when selling a property. Or selling a hedge fund which may only trade on an annual /quarterly basis, meaning you can only sell once a year or quarterly. While lower liquidity can be a trade-off for the potential of higher returns, it’s crucial to understand and account for the implications of reduced liquidity in your overall investment goal.

Higher Fees

Alternative investments typically come with higher fees than traditional investment vehicles, including management fees, performance fees, and administrative costs. These higher fees can eat into your returns, so it’s essential to evaluate the fee structure carefully and ensure that the potential benefits outweigh the additional costs.

 

FAQs

Should I consider alternative investments?

If this is a relatively new concept, speak to your financial advisor. Speaking to a certified chartered financial advisor can provide you with an unbiased opinion on whether you need to invest in alternatives. Financial advisors can offer you their opinion on taxes you may incur that are not applicable with traditional investments.

What should I consider when selecting alternative investments?

When choosing alternative investments, a general rule is that the higher the risk, the higher the return expected and required. This means that if you opt for investments with greater risks, you should also expect and require correspondingly higher returns to justify those risks.

Does Private Capital invest in alternative investments?

Private Capital’s philosophy stems from an evidence-based investment with the belief that capital markets deliver long-term returns. We invest, we do not speculate and we don’t predict the next best ‘thing’. Even though our strategy consists of buying stocks and bonds, somewhere in our equity holding, we will be indirectly holding alternatives.