Investing in alternative investments may be a consideration for some investors. But you should consider the advantages and disadvantages before diving into high risk investments that require expertise. Most importantly, make sure it fits into your investment risk management plan.
What is an Alternative Investment?
An alternative asset investment is one that is not normally in a conventional portfolio of stocks, bonds, and cash. Investments such as gold and silver bullion, hedge funds, venture capital investments, and collectibles such as art, antiques, fine wines, stamps, coins, etc., would be considered alternative investments. Some people include real estate in this category, but others don’t.
Advantages of Alternative Investments
Investing in alternative investments offers the potential for large returns to those who have the knowledge and expertise to make wise decisions. Along with higher risk comes higher potential gains. Sometimes returns can be extraordinary.
Another advantage of investing in alternative investments is owning assets that are not correlated to conventional portfolio investments which can provide additional portfolio diversification. Owning non-correlated assets in a portfolio can lower overall portfolio risk and provide the opportunity for greater returns.
Disadvantages of Alternative Investments
Investing in alternative investments requires a high level of knowledge and expertise on the part of the investor. Many of these investments are illiquid. This may make it hard to find buyers and sellers, hard to determine the current value, and may require extraordinary fees and commissions to handle, store, or market.
Also, keep in mind, alternative investments are subject to higher level of investment fraud, scams, and schemes than most conventional investments. This requires a higher level of scrutiny and due diligence by the investor.
Another factor to consider is investors have found that in periods of financial turmoil many alternative investments may be more volatile and have a higher correlation to traditional investments (such as stocks) than they anticipated. This negates one of their perceived advantages.
Investing in Alternative Investments
Most investors should concentrate on sound investing principles such as asset allocation and proper diversification with an emphasis on value investing. Don’t be distracted by the lure of high returns and risky endeavors unless you fit the profile of someone who needs additional diversification.
Investing in alternative investments can be rewarding for those with special expertise and investors who can afford the high expenses and risk. But, unless you are an investor with a high net worth or an extraordinary understanding of a particular collectible or asset, dabbling in alternative investments can be risky and a costly endeavor.