It is not uncommon for investors to be drawn to popular investment types such as stocks or bonds. These investment vehicles are suitable for beginners and offer attractive margins, after all. However, savvy investors should always consider diversifying their portfolios with alternative investments.
If you find yourself asking “what are alternative investments,” you are not alone. Alternative investments are the asset types that don’t typically come to mind when thinking about investing. With the right management however, these assets can be just as profitable (if not more so) than common investment types. Keep reading to learn more about alternative investments and how they can benefit your business.
Alternative investments are asset types that fall outside the realm of traditional investment opportunities. Some alternative investment examples include hedge funds, tangible assets and private equity. The reason many investors turn to these investments is because they offer the chance to diversify. Over time, a diverse portfolio can help minimize overall risk and increase long-term income.
It is important to understand that alternative investments are typically more complex in nature when compared to common investment types. They often require investors to be accredited or have high net worths; however, they are becoming increasingly more accessible for investors of all types.
Benefits Of Having Alternative Investments
While alternative investments differ from traditional investments, they share a common benefit: the opportunity to build wealth and achieve financial freedom over time.
What makes these investments unique is the wide range of benefits offered outside of their high profitability. Here are just some of the benefits offered by alternative investments:
Diversification: Alternative investments are beneficial because they represent the chance to diversify. Investors can work with alternative investments to create a well-balanced portfolio and—in turn—minimize their overall risk.
Active Investing: Alternative investments can be more complex in nature, especially when compared to assets like bonds or CDs, but this should be viewed as a positive. By requiring more active involvement, investors have a say in what happens to their portfolios.
Low Market Influence: Investments such as stocks are known to shift based on various market factors, but alternative investments are often shielded from the same effects. While alternative investments are not immune to risk, their low market correlation can be beneficial to investors searching for decreased volatility.
Tax Benefits: There are a number of tax benefits that accompany alternative investment types. The specific perks will vary with every investment, but many alternative investments benefit from lower capital gains taxes.
Types Of Alternative Investments
Investors hoping to work with alternative investments should be sure to familiarize themselves with the different options available. The following are some of the best alternative investments:
Private equity refers to funds that are invested directly into companies, rather than publicly traded stocks. Businesses can use this money for expansion, marketing and acquisitions. Many private equity firms will require long holding periods, and share prices are typically determined through negotiations. Many investors choose to work with private equity firms instead of making direct investments themselves in order to to avoid dealing with the lengthy negotiation process. Private equity firms work by raising money from investors and investing said funds in different businesses.
There are a few types of private equity investments investors should be aware of: distressed funding, leveraged buyouts and “fund of funds.” Distressed funding refers to the process of investing in an underperforming company with the hope of improving said company’s sales in order to build equity. Leveraged buyouts, on the other hand, are a form of private equity that involves completely purchasing an underperforming company and selling it to another business for a profit. Finally, “fund of funds” refers to private equity that is used to invest in other asset types, such as hedge funds or mutual funds. This type of equity allows investors, who would otherwise be unable to invest in hedge funds independently, get started in this field.
A hedge fund refers to a pooled investment structure that—in theory—allows participants to benefit, regardless of the market. Hedge funds have become increasingly popular in recent years, despite only being open to accredited investors. They are typically available to small groups of investors, usually up to 35 at a time. To learn more about becoming an accredited investor, read this article.
The purpose of hedge funds is to minimize overall risk and maximize returns for investors, although there is still some risk associated with this investment vehicle. While hedge funds often invest aggressively, they invest in a wide variety of asset types to mitigate risk during times of market fluctuation. Some examples of hedge funds include macro, equity, relative value and distressed hedge funds.
This alternative investment involves financing startup companies and business. Venture capital specifically refers to equity in private companies that are projected to achieve high growth. While venture capital may sound similar to specific forms of private equity, it is important to understand their differences. Venture capital exclusively refers to equity in recently formed companies, while private equity involves financing more mature companies.
Venture capital is known for its return potential and associated risk. When investors choose the right company, they will see significant returns in about three to seven years. On the other hand, there is inherent risk involved when predicting the future performance of a company. In some cases, investors will have a say in business operations or take on an active role in the company. The different forms of venture capital include seed, early stage and expansion investments.
Tangible assets are exactly what they sound like: physical investments. These can include gold, real estate, natural resources and more. Tangible assets are highly sought after because—in many cases—they are able to avoid the negative effects of market fluctuations that other investment types are not. For example, investors who choose to invest in real estate can benefit from built-in demand, while other investments, like stocks, are more directly impacted by market shifts.
Tangible assets are one of the best alternative investments because they are accessible to investors of all experience levels. While some investment types require accreditation or high initial investments, tangible assets, like real estate, are easier for beginners. For example, many investors hoping to pursue real estate will be happy to know there are multiple financing methods that can make this investment goal a reality. To learn more about securing your first real estate investment, be sure to read this article.
Classic cars, fine wines and vintage art are just a few examples of collectible items that can be sold for a profit. Investors who collect precious items benefit because they typically increase in value over time. They will receive profits once an item sells.
There can be a few challenges to owning collectibles. For example, items are only valuable if kept in good condition. In many cases, collectibles will require regular maintenance or protection from signs of aging. Additionally, investors must be able to find a buyer in order to receive profits for these assets. Investors who are able to keep items in good condition and identify potential buyers, will profit from their collectibles.
Tips For Getting Started With Alternative Investments
Anyone interested in alternative investments should carefully consider the pros and cons. These investment types are often not as straightforward as other assets and therefore require more research before getting started. Here are some tips for those who plan to pursue alternative investments:
Alternative investments are often less regulated than traditional investing options. According to Investopedia, this can make them more prone to scams or fraud. Keeping this in mind, it is crucial that investors mind their due diligence when making any investment decision to avoid potential risk.
Investors may notice that some alternative investments have high up-front fees; however, it is important to understand that they can also result in higher returns in the long run. As you consider different alternative investments, pay close attention to initial investment fees, transaction costs, and ROI to make an informed decision.
For many alternative investments, there are financial advisors or fund managers prepared to do the heavy lifting. Do not let the idea of a learning curve intimidate you from choosing a profitable alternative investment. Instead, research opportunities to get a better understanding of the required level of involvement.
While alternative investments are different from traditional assets, investors should still evaluate several key factors when making a decision: risk level and liquidity.
It should come as no surprise that alternative investments offer investors a number of benefits. After all, the strongest investment portfolios are those that are most diverse. By paying careful attention to different asset types, investors can help increase their profits while minimizing overall risk. For those still asking themselves “what are alternative investments,” the answer is clear: alternative investments are another opportunity to build financial wealth and achieve long-term success.
Which alternative investments are you excited to learn more about? Share your thoughts in the comments below: