When it comes to investing, there are many options to choose from. From blue-chip stocks and bonds to commodities like gold and oil, investors have a variety of choices when it comes to allocating their capital. These days, the term “alternative investments” is thrown around quite frequently when it comes to discussions about where to put one’s money. But what exactly do these terms mean? What are some examples of alternative investments? And if you’re interested in exploring this asset class further, how can you invest in alternatives as an individual investor? The following top 5 reasons why you should consider investing in alternatives will help you understand why now is the right time.
A key reason to consider investing in alternatives is to help diversify your portfolio. Diversification is a key principle of modern portfolio theory, which suggests that investors should not put all of their eggs in one basket when it comes to managing their assets. This means that you should not just invest in stocks or bonds, but rather have a well-balanced portfolio made up of different asset classes, such as equity, bonds, commodities, real estate, and other alternatives. Investing in just one type of asset makes an investor vulnerable to the whims of that particular market. This is especially true of equities, which are highly correlated with the stock market and can be extremely volatile. However, many alternative investments do not correlate with equities at all. Alternative investments are a smart way to diversify your portfolio and help reduce your overall risk exposure.
Another reason to consider investing in alternatives is that many of these asset classes have low correlation with equities. A correlation coefficient between two assets tells you how closely their prices move in relation to one another. A correlation of 1 means that two assets move in lockstep with each other, whereas a correlation of 0 means that there is no relationship between the two. One of the reasons why investors are drawn to alternatives is because many of these asset classes have a low correlation with equities. This means that during times of stock market volatility or downturn, when many investors see their portfolios decline, you can still see positive returns from your alternative investments. This makes these assets extremely valuable for investors looking to diversify their portfolios.
One of the biggest draws to alternative investments is that they often offer very high returns. This is especially true of certain private equity and venture capital funds, where investors can net returns of upwards of 50% each year. These types of funds are highly illiquid, which means that investors cannot withdraw their money whenever they’d like, but they often make up for this with extremely high payouts. Alternative investments that are highly illiquid are typically meant for investors who plan to hold onto their assets for the long haul. Short-term investors should steer clear of these types of investments, as they are not meant to be traded frequently. With such high payouts, investors can see very high returns in a relatively short amount of time. This makes the high level of illiquidity worth it for many investors.
One particular alternative investment that is extremely lucrative is late-stage venture capital. Venture capital is an investment in a company at an early stage of development, often before they have been listed on the stock market. With late-stage venture capital, investors are able to get in on the ground floor of companies poised to go public. If the company is able to go public, the investors can then sell their shares for a significant profit. Late-stage venture capital is a very exclusive asset class, and it is difficult for retail investors to access. However, there are some mutual funds that specialize in this type of investing, which means that you can still have access to these lucrative investments. In order to do so, however, you must have a large amount of money to invest, as these types of funds have very large minimums.
A third reason to consider investing in alternatives is that many of these asset classes can be accessed using only your IRA. While most asset classes are limited to being held in a standard brokerage account, certain types of mutual funds, real estate, and private equity can be held in an IRA. This means that you can still use your IRA to invest and take advantage of the tax benefits that come with it. This makes alternatives a particularly attractive asset class for people who are looking to use their IRA to make additional investments.
A fifth reason why you should consider investing in alternatives is that they can be a smart way to use idle cash. Many of these asset classes are illiquid and do not allow investors to withdraw their money quickly or easily. This makes them a poor choice for investors who need quick access to their capital. However, with some of these investments, it is not uncommon for investors to wait five years or more before they are able to withdraw their money. This makes these investments a smart way to use idle cash that you cannot currently put to better use. You may lack the knowledge or expertise to make better investments with this money, but with options like private equity, you can still make a sound investment.
The benefits of diversifying your portfolio and investing in alternatives are numerous. Not only do they help investors to protect themselves in the event of a market downturn, but they also allow investors to make higher profits than they would otherwise. When deciding how to diversify your portfolio, consider investing in alternatives to protect yourself in the long run.