When you ask anyone how they diversify their portfolio, most people think of traditional assets like stocks, bonds, and cash. Yes, these are book components of a balanced portfolio. But, as Invezty.com says, they don’t entirely represent the full range of investment opportunities. There are alternative investments. It’s only that most investors think they need a corner office in the Square Mile to invest in such.
But did you know that, even with little knowledge of the financial markets, you, too can use these alternatives to maximize your returns and reduce your overall risk? Today, we are helping you to learn how to diversify your portfolio using alternative investments. But first, let’s address the basic question, what are these investments?
Traditionally, investments had three categories – stocks, bonds, and cash. So, any investment outside the scope of these conventional categories is thus considered an alternative investment.
In lay terms, an alternative investment is a financial asset we can’t classify as stocks, bonds, or cash.
These alternative asset classes have different return patterns and come in handy in distributing risk in a portfolio. They include real estate, private equity, hedge funds, commodities, and precious metals. Most recently, marketplace lending, cryptocurrency, and NFTs have joined the growing list.
How to get started with investing in alternative assets
We want to bridge the knowledge gap. So, if you are no longer holding back on alternative investment, the right place to start is with your financial goals. Afterward, through research and learning, everything else will fall into place. But let’s break down this journey.
1. What are your goals?
We all understand the targetted outcome of an investment is to have your money generate more money for you. But you need that money to do something. Perhaps you are saving for a new home, your children’s education, or your retirement. It’s also where you decide whether you are looking for long-term growth, regular income, or a hedge against inflation. Defining your financial objectives helps you refocus your investments on the right. In a nutshell, your overall investment strategy determines your investment choices.
2. Bridge your knowledge gap
From real estate to cryptos, alternative assets are complex and come with unique risks and complexities. Take your time to learn about these asset classes, how they work, and the factors that determine their value. The more informed you are, the better your chances of making successful investments. If you commit yourself to learning about these investment vehicles, they will no longer feel complex or inaccessible.
3. Diversify within alternative assets
The most effective approach to investing is to utilise strategies that rely on factors that are not closely correlated. Put simply, spread your investment, and this doesn’t only apply to traditional assets, but to the contemporary ones as well. As it’s said, you don’t want to have all your eggs in one basket. Spread your money across different asset classes, such as real estate, commodities, and private equity. If one asset underforms or suffers losses, the gains on the other assets will offset it. Doing so reduces the overall risk, and increases your chances of strong returns.
4. Consider using funds or ETFs
If you’re new to alternative assets, consider using funds or exchange-traded funds (ETFs) to gain exposure to these assets without directly owning them. For example, if you’re interested in real estate, you can invest in a REIT. And if you want exposure to cryptocurrencies, you can buy a crypto-focused ETF. These funds allow you to invest in a diversified pool of assets and reduce the complexity of managing individual investments.
5. Work with a financial advisor
Alternative assets can be complex, so it’s a good idea to work with a financial advisor to guide your choices. These professionals can assess your risk tolerance and recommend appropriate assets for your portfolio.
Risks and challenges of investing in alternative assets
Some alternative investments, like cryptocurrencies, hedge funds, and private equity, come with a lot of risks. Some may lack transparency and may be difficult to fully assess, others are extremely volatile. But if you understand the risks, you can maneuver through and profit. Here are a few such risks you should watch out for when investing in alternative assets::
1. Liquidity risk
Stock and bonds are very liquid as they are easy to sell. But that’s not the same for many alternative assets. Commodities, e.g. an artwork, may be difficult to sell quickly if you need access to cash. Another example is a real estate property. Unless you are selling at a throw-way price, it can take months or even years to sell. The same goes for collectibles, which might not even have a ready market. So, always consider your goals for investing in such an asset and its liquidity before adding them to your portfolio.
2. Market volatility
Frequent changes in market prices particularly relate to cryptocurrencies and commodities. These alternative assets are highly volatile, with a small market event massively influencing their prices. They also swing dramatically within short periods and may lead to significant gains or losses. If you understand these risks, you are prepared for price fluctuations and understand such assets are for the long term to realize potential returns.
3. Lack of regulation
Many alternative asset classes, such as cryptocurrencies and private equity, are less regulated than traditional investments. This also makes them less transparent and can lead to higher risks, including fraud. But knowledge is your guard. Always conduct thorough research and be cautious of unregulated investment opportunities.
4. Valuation difficulties
Unlike stocks, which are traded on exchanges with publicly available prices, many alternative assets do not have easily accessible pricing data. This can make it difficult to assess the fair value of an asset and can lead to overpaying for an investment.
5. Higher fees
Investing in alternative assets can come with higher fees, particularly when using funds or working with financial advisors. Private equity investments, for example, often involve management and performance fees that can eat into your profits.
Conclusion
Investing in alternative assets is a great way to diversify your portfolio. While there are risks to contend with, a little research can help you sail through the murky waters. Investment firms are doing it. Other investors are doing it, too? But why not you? it.
At investingGuide, we have a lot of resources that can help you learn how to diversify using alternative assets in the diversification of your overall portfolio. So, why not give alternative investment solutions a try?
The above information does not constitute any form of advice or recommendation by London Loves Business and is not intended to be relied upon by users in making (or refraining from making) any finance decisions. Appropriate independent advice should be obtained before making any such decision. London Loves Business bears no responsibility for any gains or losses.
