Investing in Alternative Investments – Is It Right For You?

by KenFaulkenberry

in Portfolio Management

Investing in Alternative Investments?

Investing in Alternative Investments

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.

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 investment 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.

Related Reading:

Perceived Risk vs. Real Risk: A Key to Successful Value Investing

Investment Portfolio Management Basics: Risk, Asset Allocation, & Investing Strategies

Written by KenFaulkenberry

KenFaulkenberry

AAAMP Blog by Ken Faulkenberry
Ken Faulkenberry earned an MBA from the University of Southern California (USC) Marshall School of Business with an emphasis in investments. Ken has 25 years of investment experience and is dedicated to helping people with self-directed investment management through the Arbor Investment Planner. His asset allocation strategies have an outstanding performance record.
Subscription Information

  • Share/Bookmark

{ 6 comments }

Roger Wohlner

As always Ken well-written and sound advice. Excellent point about the higher level of fraud and scams associated with these investments. The Yale endowment has the manpower and sophistication to perform proper due diligence on alternatives unlike most individual investors.

KenFaulkenberry

Thank you Roger. People have to be careful not be lured into risky investments without first understanding all the risks, and secondly, be able to handle the risks financially.

Harry @ PF Pro

The only real alternative investment I have right now is P2P lending with lending club. I only have <$1,000 though so it's not too substantial. My returns have been awesome though after two years.

Even though I've seen good results after two years, I'm still a little hesitant because the platform is so new.

KenFaulkenberry

You are right to be cautious. Peer to Peer Lending is untested and has not faced a major economic downturn yet. It is the equivalent (or worse) of Junk Bond investing. Investors should not put money into P2P that they cannot afford to lose!

Keira Aimee

An alternative investment is any investment other than the three traditional asset classes: stocks, bonds and cash. But alternative investments don’t take the place of those more traditional assets.

KenFaulkenberry

Some people include real estate in the “traditional” asset class, but that is debated. Thanks for dropping by.

Comments on this entry are closed.

{ 2 trackbacks }

Previous post:

Next post: