4 pros and cons for alternative investments that aren’t stocks and bonds
Alternative investments are expected to reach $23 trillion in assets under management by 2026. So what are they and should you consider them?
Often, investors put money in stocks and bonds, which are considered traditional types of investments. However, there are many ways to invest, including alternative investments.
Alternative investments are private assets that don't fall under the traditional types of investments. They include:
- Hedge funds. Pools of privately owned financial assets.
- Currencies. Forex via exchange-traded funds (ETFs).
- Real estate. Housing market investments such as the real estate investment trust (REIT).
- Commodities. Gold, oil, natural gas, crops, livestock, etc.
- Collectibles. Art collections, vintage cars, collectible cards, coins, etc.
The global alternative assets under management (AUM) might grow from $13.74 trillion at the end of 2021 to $23 trillion in 2026, according to a 2022 report from Prequin. It also reported a compound annual growth rate (CAGR) of 10.7%.
In Australia, Austrade reported that Australia reached more than $275 billion AUM before the pandemic. It was the fourth-largest market in the world. So if you are considering alternative investments, these pros and cons will help you make informed decisions.
1. Portfolio diversification
A lot of investors are looking to have a diversified portfolio. It happens when you have a variety of financial assets instead of a single type. Its primary benefit is to reduce your risk, so you don't put your "eggs in one basket".
Having alternative investments gives you a diversified portfolio. Aside from investing in stocks and bonds, you can put your money in a hedge fund, REIT or forex. Such diversification will minimise your financial risks.
2. Traditional investment counterbalance
It's easy to see why investors put money in stocks and bonds. You might have invested in Apple, Spotify and Netflix due to their high returns for the last 3 years.
Understand, however, that the recent market is volatile. To counterbalance your traditional investment, consider investing in alternative assets.
Alternative investments have a low correlation with conventional market indices. They will help reduce the overall volatility of your portfolio. If the traditional market is in a downturn, your alternative investments won't be affected.
3. High investment returns
Catherine Schwartz, finance editor at Crediful, told me an investment was one of the paths to financial freedom.
She said, "high ROI is the ultimate investment goal. As alternative assets require high minimum investments, expect high returns as well."
Per Forbes, high ROI (return on investment) in alternative investment shows in a study called The Rate of Return on Everything. It examined the performance of 16 advanced economies for the past 145 years. The study revealed that real estate, one of the alternative assets, provided the best returns.
4. Fun alternative investments
Financial investments appear to be a serious matter. Of course, you are dealing with money which you plan to grow over time.
It's especially true with traditional investments, such as stocks and bonds. It is wise to review financial statements and study the market.
However, Daniel Apke, CEO of Land Investing Online, believes investing should also be fun.
"Alternative investments offer more excitement and are less boring. You want to study and learn more about diversifying your portfolio. The more excited you are, the more interested you'll be in growing your money," he said.
1. Less liquidity
Alternative investments are more private than public. Their assets are more illiquid than the traditional types. It means that you cannot easily and quickly convert them into cash.
Andrew Gonzales, president of Business Loans, said that illiquidity is one disadvantage of alternative investments.
"You might be tied up to your investments for a longer time. Thus, it will be hard for you to exit and convert your assets into cash," he said.
2. Complex investment structures
Of course, traditional investments are well-established and legally regulated. Most financial investors know what they are and how they work. On the flip side, alternative investments can get complicated. They require research and due diligence.
Jeff Zhou, CEO of Fig Loans, suggests doing homework before investing in alternative assets.
"Assess if you're willing to navigate through the complex processes. They don't only require money. You need time and energy to learn how they work and how you'll grow your money," he said.
3. Lack of regulations
Alternative investments don't strictly follow regulations in the financial market. They aren't subject to any reporting requirements.
Let's take collectibles, commodities and property investments, for instance. Be wary of putting your money in them.
The lack of regulations makes it difficult to value these alternative assets. That translates to pricing difficulty, less transparency and vulnerability to potential scams. Thus, do your research and understand the risks involved before investing.
4. High minimum investments
Not all investors can easily access alternative investments, because many of them require a massive amount of money. They also carry higher fees than traditional investments.
Anthony Martin, founder and CEO of Choice Mutual, recommended taking calculated risks in financial investments.
"The more money you put in, the higher the risk is. But if you know what you're getting into, you'll potentially earn many high returns," he said.
The bottom line
You may invest in stocks and bonds the traditional way. You can also consider alternative investments through hedge funds, real estate or collectibles.
But before taking the plunge, weigh the potential benefits and risks involved. More importantly, seek financial advice from experts for your portfolio.
Nate Tsang is a serial entrepreneur, part-time investor and founder of WallStreetZen. He holds a Juris Doctor (JD) degree from UAlberta Law and is passionate about building great software that delights users.
Disclaimer: The views and opinions expressed in this article (which may be subject to change without notice) are solely those of the author and do not necessarily reflect those of Finder and its employees. The information contained in this article is not intended to be and does not constitute financial advice, investment advice, trading advice or any other advice or recommendation of any sort. Neither the author nor Finder has taken into account your personal circumstances. You should seek professional advice before making any further decisions based on this information.
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