Investing is a vital part of our world as it helps keep our economies thriving by generating money and spending it. Most people know the common types of investments that the majority flocks to, such as cash, bonds, and stocks, and so on. However, there are also alternative investments that not many are familiar with or are not willing to try. Let’s look at what alternative investments are and what pros and cons they come with.
What is an alternative investment?
An alternative investment in the financial world is one that does not fit into any of the traditional investment categories. As they are not the typical type of investment, they come with risk, a lack of regulation, and overall complexity that many prefer to avoid. Therefore, most alternative investment assets tend to be acquired by institutional investors, successful entrepreneurs, or accredited, high-net-worth people. Examples of alternative investments include real estate, derivative contracts, hedge funds, managed futures, private equity or venture capital, even assets such as art investment funds and antiques. These are not the average person’s first choice when they think of investing; however, what they don’t understand is despite the risk; the reward is undoubtedly worth it.
Alternative Investment Pros
The Reward is worth the risk
The performance of Alternative investment assets is usually not correlated with the performance of other markets such as the stock market; therefore, they present a very attractive opportunity to generate way more return on investment than conventional types of investments. That being said, the risk is also way more than that of stocks and bonds and cash or any other traditional investment asset. The higher returns that come with alternative investments are due to extensive and assorted knowledge acquired about the specific investment.
The overall volatility is reduced
As the performance of alternative investments is not connected with the performance of other markets, they would assist in reducing the overall volatility of a portfolio full of traditional investment assets.
Diversification
When investing, it is important to keep diversification in mind to eradicate the chance of having one of the few that you have underperformed, which puts you at a complete loss; in other words, “don’t put all your eggs in one basket” Yes this is true! Alternative investments, therefore, provide you with a variety of options that allows you to have an assortment of investments in your portfolio. In order to get the best scenario to put your investment, click here.
Tax advantages
Alternative investments offer tax benefits that you typically wouldn’t get with conventional investments. Why? Most long-term alternative investments accumulate capital gains tax, which is taxation upon realized gains. This means that the only time you are expected to pay taxes on the money is when it is a large return or a large amount of money.
Alternative investment cons
Illiquidity
Alternative investments are usually very private and unpredictable, therefore very volatile. For this reason, they tend to be very illiquid, and you cannot easily sell the assets for quick cash when you need it, so your funds may be held for a long period of time as it will be rather hard to exit.
Overall complexity
Alternative investment assets are generally more complex than conventional investment assets. They need you to have a higher sense of due diligence. Therefore before considering investing in these alternative investments, you need to be able to do your research and understand the potential risks and consequences associated with the investment.
High fees
High fees are to be expected when it comes to alternative investments due to their nature; however, it is still an added disadvantage.
High minimum investment
As we have established that alternative investments are not suitable to the average person, it stands to reason that the minimum investment is very high as well and may not be readily available to all investors.
No regulation
One disadvantage that is alarming when it comes to alternative investments is the lack of regulation. These types of investments are not regulated and do not have any reporting requirements. Therefore, if the company offering the asset or investment goes broke, you are likely to lose your money as well.
Valuation difficulty
Alternative investment assets are usually hard to value, and as a result, the difficulty in pricing increases and price transparency is lost.
Conclusion
Like any other form of investment, alternative investments have their pros and cons, but despite that, they seem to be increasingly more popular with investors nowadays. Nevertheless, before taking a leap into this rewarding yet risky venture, make sure to consult your financial advisor first.
