Alternative investments have increased in popularity over the past few decades and, in the past decade, have turned into a mainstream investment. The driving force behind this shift is the emerging market economies. Find out more about these investments and how they have turned into an increasingly critical capital resource.
About Alternative Investments
An alternative investment is one that does not come under traditional forms like stocks, bonds, and cash. It includes real estate, private equity, cryptocurrency, and more. Such types are preferred because:
- They have less risk since market fluctuations do not affect them.
- By adding such types to your existing portfolio of traditional instruments, you can diversify it and also minimize the risk involved.
Some of their important features include:
- Minimal similarities with traditional instruments like bonds and stocks.
- Low liquidity.
- Minimal data on returns and risk involved.
However, you have to do an in-depth analysis in order to assess the present value of such assets. Here are a few options that have been good to investors over the past decade.
1. Real Estate
Residential and commercial properties offer appreciable returns. In fact, it has made many millionaires over the years. And hence, these are preferred for any type of portfolio, including the long and short-term ones. Such investments cover options like:
- Purchasing properties that are undervalued and renovating them, turning them into profitable assets.
- Buying shares in commercial property via crowdfunding sites that manage and rent the property.
To get high returns, you need to have certain skills, patience, and, most importantly, some luck. But when compared to other forms, this is a safe choice that works well in all phases of an economic cycle.
However, there are downsides here, such as the value depreciation. Thus, this is not good for the short-term. But, over the long-term real estate always provides good returns. And you can also avail of tax breaks for property investments.
2. Precious Metals
Investing in platinum, silver, gold, and other precious metals are considered lucrative. Instead of being an income-generating option, these help to hedge in times of inflation or market fluctuations.
- The value increases during inflation but tends to stabilize later in an advancing securities market condition and when the inflation dwindles.
- When there is a drop in the value of your securities, the precious metal investment helps to offset the loss.
However, there are downsides like:
- You cannot generate wealth with them as they remain stable over the long-term, providing very little leeway for growth.
- Metals like gold are prone to hoarding and government confiscation.
- They can be easily manipulated in the event of a production decrease or increase, resulting in price fluctuation.
While some may favor the use of ETFs in gold or mining stocks, they have additional fees that are not present in case of physical buying.
3. Equity Crowdfunding
This is an innovative way of benefiting from your investment. Here you own shares of a startup or budding businesses.
- Possibility of high returns in the event of the company performing well.
- There is power dilution with more investors being part of the company.
This type of crowdfunding platform also carries some risks:
- If the company does not prosper, your share value dips.
- Making gains can take more time affecting your ability to sell and make a profit from them.
- Dividends are not possible until you sell the shares.
- You will not be able to find markets where the shares can be sold. In other words, the investment will be illiquid.
- The share value stands the risk of being reduced if the company decides to raise capital and sell new shares, reducing the percentage of shares you have.
While earlier only venture capitalists and angel investors could invest in startups, this alternative form is open to a much larger investor group.
This is another lucrative alternative to conventional investment options. In the event of a recession and economic downturn, these can help to counter the risk. This is because they are not affected by the performance of stocks and indices.
While there is a problem concerning the regulation of this digital currency, there have been several changes in the past couple of years. Certain key influencing factors help this type of alternative investment work in your favor. These include:
- Improvement in trading infrastructure
- Proper regulatory policies
- Influence of retail and institutional elements
- Ease of exchanging the digital form with fiat currency
- Diversification of your portfolio
- Flexibility and hedging options with trading that are undergoing growth
By having these as a small part of your investment portfolio, you can minimize volatility and maximize returns.
5. Tax Liens
A good way to diversify your portfolio is investing in tax liens. When a property owner does not pay the taxes due on the property, the government can legally claim or make a lien on the property for the owed money. This tax lien is sold as certificates which investors can buy. A specific time is given to the owner to pay the money owed, along with interest and penalties. If they do not pay on time, the lien can be foreclosed.
- You achieve greater portfolio diversification.
- Interest rates range from 3% to 7%.
- The money invested will usually be paid back by the owner.
- If foreclosure happens, you get to own a property at an incredibly cheap rate.
However, there are disadvantages too:
- You have to do proper due diligence, which takes time.
- You have to understand details such as the expiration date and repayment schedules.
- You may also have to spend money on making repairs or eviction of residents on the property.
While alternative investment options lure you with the promise of high returns, there are several shortcomings that you have to consider. Just like any other conventional option, these too need a proper investigation of the pros and cons to assess their suitability. Remember that they should be part of your portfolio and not make the entirety of it. Ensure they serve their purpose before making your decision.