Navigating the Uncertain Waters of Alternative Investments

A diverse portfolio needs a balance between stocks and alternative investments, which are often illiquid, unregulated, and inaccurately priced.

FREMONT, CA: Alternative investments can have high entry barriers, but they offer unparalleled portfolio diversification, which is especially important when investing for retirement. Financial markets like stocks and bonds may suffer when hedge investments are made. They offer exposure to markets like real estate, commodities, and even art.

The popularity of alternative investments increases during down markets — but the risk level is higher, so they should be carefully researched. Unlike traditional investments, alternative investments, such as hedge funds and private equity, tend to yield higher returns in down markets. In addition to being more volatile and risky than traditional investments, these investments should be carefully researched before investing.

Collectibles: Collectibles are not traded on public exchanges. There must be pricing transparency or an official mechanism for determining market value. Other than auction results, there are no published prices at all. Many dealers keep sales confidential. To see how useful it is, consult an expert regarding collectibles. Your possessions may only be worth a little money despite their sentimental value. Make sure you document your own, then prove what you have. This will be invaluable when searching for a buyer.

Commodities: The price of commodities can be quite volatile because supply and demand determine the price. Trading futures contracts rather than commodities itself is popular among traders. It's investing in which direction prices will move and making money off of correct guesses. But if you're just getting started, it can be challenging. Stocks that track or reflect the commodity you're interested in, for example, are much easier to purchase than the precious metal itself, but they often move alongside it.

Derivatives: It is rare for them to buy and sell actual assets anymore. Instead, they operate more speculatively. Instead of insulating a farmer's grain harvest and protecting his income, they have become increasingly popular among traders hedging their portfolios. The distancing of derivatives causes them to respond to market sentiment, resulting in movements unrelated to asset price. Derivatives can become surprisingly illiquid due to this inflation when you're trying to buy and tank when trying to sell.

Private equity: A significant amount of capital is required by private equity firms. They are usually not accessible to the average investor. The minimum investment usually costs USD 25 million, but it can be as low as USD 250,000. The instrument is out of reach for most people, but there are now more affordable options, such as funds of funds, which invest in hedge funds, mutual funds, and exchange-traded funds. Investing in private deals has also been made more accessible through crowdfunding, which has significantly lower investment minimums.

Alternative investments offer compelling benefits — portfolio diversification, a counterbalance to traditional financial assets — but also have drawbacks. There is a major risk of liquidity and transparency even when buy-ins are accessible. A sophisticated investor may be able to make a lot of money in such an environment because there are no regulations and open pricing. Taking on one of the above investments means wading into the opaque territory. Alternative investments involve tedious complexities that require sharp senses, a strong stomach, and endless patience. An alternative investment might be too high-risk for a novice investor if they do not have those well-honed skills — and a heaping helping of luck. Investors who lack those skills might find alternative investments too risky. Alternatively (to the alternatives), consider investing in publicly traded assets like individual stocks or funds that invest in alternative asset classes to get your feet wet. Ultimately, it allows you to stay one foot on traditional investment - often without committing much money. If all goes well, you can invest in alternative investments later.