Chances are, you’ve heard projections about today’s volatile, uncertain market. But what does that even mean? Most recently, this refers to inflation, high interest rates, and the possibility of another recession around the corner. So, as an investor, it’s worth diversifying your investments to reduce the risk of losing them in a market downturn.
Alternative investments aren’t new, but many investors have turned to them now more than ever due to their low correlation with traditional investments (stocks, bonds, or cash). Because of this, alternative investments can be a defensive form of investing because they often move in the opposite direction of traditional investments.
Some investors also prefer alternative investments due to their high return potential. However, the potential for loss can be more significant, too. Let’s explore the risks and rewards of alternative investments. Remember that no matter whether you’re a seasoned investor or a newcomer, it’s always beneficial to consult a financial advisor before pursuing an alternative investment strategy.
What Are Alternative Investments?
Alternative investments are any financial asset other than stocks, bonds, or cash. These include private equity, hedge funds, real estate, expensive artwork or collectibles, gold or silver, and other valuable commodities. Compared to more traditional investments, alternative investments usually have the following characteristics:
- Lower liquidity
- Less regulation
- Lower transparency
- Higher fees and risks
- More legal and tax considerations
Investing in Alternative Assets
Alternative investments have become more sought-after in recent years as technology and regulations have made these investments accessible to the general public. However, some alternative investments are only open to accredited investors because they are more complex and riskier than conventional investments.
According to the U.S. Securities and Exchange Commission, accredited investors have a net worth of at least $1 million or have earned $200,000 ($300,000 for married couples) in the previous two years. High net-worth investors are often in a stronger financial position to withstand the risks of alternative investments.
That said, non-accredited investors can diversify their portfolios with certain alternative assets through exchange-traded funds (ETF), real estate trusts, crowdfunding platforms, small business loans, peer-to-peer lending, and cryptocurrencies. Another way to circumvent this accredited investor requirement is to work with a financial advisor. Recent legislation allows financial advisors to qualify as accredited investors.
A Different Approach to Your Portfolio
Think about your specific goals to determine if alternative investments are suitable for you. You can use alternative investments to protect against volatility and uncertainty. However, these assets lack liquidity and complex strategies require a long-term outlook.
It’s also worth noting that alternative investments are often unregistered securities. If you have enough risk tolerance and can afford to keep your finances in an investment for at least 10 years, alternative investments can be a valuable asset to a portfolio. No form of investment is guaranteed to secure your portfolio or produce a lucrative return, but turning to these alternative investments could help you earn higher-than-average rewards.
Work With a Financial Advisor to Meet Your Goals
Partner with a financial advisor to seamlessly work alternative investments into your portfolio. Diversification is beneficial, but alternative investments are not without risk. A financial advisor can help align these alternative investments with your financial goals.
