What is an Alternative Investment

You may be very familiar with the most common types of investments: stocks, bonds, mutual funds, cash, and even property.  However, alternative investments are traditionally products outside the core: commodities, derivatives (futures and options), private equity, hedge funds, venture capital, and tangible assets (such as art, coins, or stamps).

The term alternative investment is generally a broad term, meaning anything outside of traditional equity products.  However, many of these products are also considered higher risk than traditional investments as well. Learn more business tips with Lee Rosen Miami and his blog.

Common Characteristics

Since alternative investments seem to describe “everything else”, here are some common themes associated with them:

  • Usually have a low correlation with the stock market, which means they perform well when the stock market doesn’t
  • Many are illiquid, meaning that your capital is locked up and you can’t access it
  • Many don’t have ways to assess market value, such as tangible assets
  • Many don’t have much historical data to compare results to
  • Many usually have high costs of purchase involved, or require the investor to be accredited by the SEC

Considering Alternative Investments?

Given these characteristics, are you still considering alternative investments?  They could have a spot in your portfolio, but like any investment, it is essential to diversify.  These investments probably shouldn’t make up any more than 5% of a portfolio, if that.

Second, you should really only invest in tangible assets if you enjoy them as a collectible versus an investment.  Tangible assets require time, effort, and expertise, and as such should be viewed more as a hobby than an investment.

Finally, if you are considering derivative investments, ensure that you do you diligence first.  These are the most liquid of the alternative investments, but also carry substantial risk for loss.  Ensure that you understand options, futures, or commodities trading before you get started.

Alternative investments can be useful, and many people have profited from them.  Just be cautious, especially when you are getting started.

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