What about Alternative Investments?
Given the recent volatility in the stock markets, coupled with high inflation, many interests have turned to alternative investments. Traditional investments – stocks, bonds, mutual funds, and cash – are generally thought of as marketable securities, meaning they are easy to sell on the open market and have well-established and publicized prices. Alternative investments include hedge funds, private equity, private debt, and real estate.
Alternatives can also include assets like art, fine wine, other collectibles, and cryptocurrency. As the category name suggest, alternative investments provide investors with options to traditional ones. They can deliver higher returns but can also be more volatile than traditional assets. Importantly, alternatives can be structured in a way to meet the risk/return profile of the individual investor.
Common alternative
investments include:
Private debt: funds that invest in the debt of private companies (in contrast to bonds, which are corporate debts traded on the public markets).
Advantages of alternative investments
The primary attraction of alternative investments is the potential for higher returns than traditional markets. Alternatives also provide diversification in a portfolio. Diversification is the concept of investing in a variety of companies and asset types to reduce dependence on any category or company, thereby reducing risk. Many alternatives are also inversely correlated with the stock market. This means their value moves opposite to the value of public markets, which reduces their overall risk.
Disadvantages of alternative investments
Risk and liquidity are two crucial factors to consider when evaluating the potential value of alternative investments,
along with any fees and disclosures that might differ from those of traditional investments.
Risk and volatility
Since managers of alternative assets are looking for higher than average returns, they generally involve greater risk, meaning the value of the assets can fall. Further, the value of these investments can change rapidly, and in greater size than traditional investments.
Liquidity
Because they are not traded in public markets, alternatives are generally considered illiquid, meaning you may not be able to withdraw your money when you want to.
Fees
Alternative investments are professionally managed, and those managers charge fees for their services. These fees are often much higher than traditional mutual funds or investment managers.
Transparency
Many alternatives are only available to sophisticated investors with the demonstrated ability to incur the associated risk of these assets. As such, the disclosures needed from alternative asset managers are more modest than for public securities, making it more difficult for investors to understand the underlying investments.
Are alternative investments for me?
Like all investments, the suitability of alternative investments in your portfolio depends on your unique circumstances and on your risk profile, that is, your ability and willingness to experience ups and downs in the value of your investments. Some questions to consider:
What are your goals and objectives?
What is your time horizon (when do you need to take the money out)?
What is your tolerance for risk?
What other assets do you own?
There is no “one-size-fits-all” answer to the question of where alternatives fit in your investment portfolio. Any prospective investor should do their homework to understand the potential investment and consult a financial advisor before investing.
But cryptocurrency is different, right?
Crypto may be the hottest topic in finance in the last 10+ years. Cryptocurrencies – Bitcoin, Ether, Dogecoin, and others – have a dual identity, kind of like a financial Batman. As its name suggests, cryptocurrency was first designed as a decentralized, digital means to exchange value for purchases of goods and services – digital money. Crypto has evolved to represent a store of value or commodity, an asset whose value rises and falls, and is therefore held by investors hoping that value increases over time, not unlike gold, silver, or securities.
But what about those infamous Bitcoin returns?
To be sure, early investors in crypto have earned handsome returns over the long term. More recent investors have experienced breathtaking swings in the value of their investments. This last fact illustrates the most important aspect of cryptocurrency (and many other alternative investments) – it is a speculative investment. Investors need to be prepared to see the value of their investment fall, even to zero -and they need to be able to invest for long periods to realize positive returns.
That said, crypto is not just a gimmick but an important financial tool. For many investors, holding a small part of their investments in crypto can make good financial sense. As with all investments, do your homework, and talk to a professional.
The bottom line on alternative investments
Alternative investments can be an important component of your investment portfolio. Each investor’s appetite for alternative investments depends on their individual circumstances. Before investing in alternative assets, consult a financial advisor to thoroughly understand the risks involved.
Post Disclaimer
Julep is not a financial institution, financial advisor, or credit repair company, and does not provide credit repair services of any kind. The information provided is for general educational and reference purposes only. The information is not intended to provide legal, tax, or financial advice. We do not propose any guarantee that the information provided will repair or improve your financial profile. Consult the services of a competent licensed professional when You need financial assistance.