Portfolio Diversification: Best Alternative Investments To Consider
by Ankita Tripathy Investing 29 November 2023
After the global economic crisis back in 2008, investors are striving to diversify their investment portfolios. The most popular investment types are stocks and bonds, but the alternative investments are heavily correlated with the state of the global economy. That being said, if the world enters yet another crisis, the stock and bond market is most likely to crash again.
Years after, the world’s economic and geopolitical situation seems to be even more unstable than it was way back when. In other words, it’s better to be safe than sorry, which is exactly why investors are diversifying their portfolios with alternative investments and creating hedges against the worst-case scenario. All of that being said, let’s have a closer look at some of those alternatives that investors are so fond of.
What Is Meant By Alternative Investments?
Alternative investments refer to investments that are not in the form of cash, bonds, or stocks. Since they are not liquid cash, it might be difficult to convert them into cash. A few common types of alternative investment that you can see are:
- Private Equity: These are capital investments in private industries that include venture capital, buyouts, and growth equity.
- Hedge Funds: Hedge funds refer to the capital pool of various investors that are later invested across multiple securities. The intention is to manage the risk of outperforming the rate of return.
- Real Estate: Investment in real estate surrounds capital around residential, retail, and commercial properties. This will be done either individually or through any property venture fund.
- Debt Investing: Here, the capital investment takes place in the form of natural resources like agricultural products, timber, and oil.
- Collectibles: These forms of investments are rare wires, baseball cards, and cars. They are purchased intending to sell them as soon as the value goes up.
Investing in venture capital
Some businesses take years to reach market success, while a selected few do so very rapidly. These business ideas that can flourish into very profitable companies in a relatively short time are always on the radar of those who wish to invest in venture capital.
Venture capital is a subsidiary of private equity investments. It’s also a good alternative to stocks and bonds for investors who have enough funds to invest. This type of investment consists of investing in startup businesses or small companies in their earliest stages of development that have the potential to become lucrative and successful on the market.
Basically, investors fund business growth and development in exchange for the shares of the company once the company is ready to have its stocks on the market. That said, even if the stock market collapses, a company can still remain operational and successful, thus generating profits for the investor. Venture capital requires a hefty investment, but it can be well worth it in the end.
Investing in precious metals
Precious metals, especially gold, have been a hedge against inflation and economic instability for years. Every time experienced investors sense turmoil in the stock market, they pour their assets into precious metals. Metals, such as silver, gold, and even valuable platinum, are highly collectible and often traded, not to mention that they’re often used as materials in various industries.
That means there’s only a slight variation in their market price and low volatility, making precious metals a safe bet when it comes to investments. So even if the overall price of precious metals does shift due to certain circumstances, the losses cannot compare to the amount an investor would lose if the company whose stocks they’ve invested in goes under.
Real Estate investments
Another alternative to good-old stocks or bonds is real estate investment. Commercial and residential properties, and even vacant land, are always highly sought-after, regardless of the global economic situation. People need a place to live, and they may not have the purchasing power to buy a property if the market prices skyrocket, but they will inevitably rent a home or an office, which means income for the investor.
Investors have an opportunity to buy properties, wait until the prices go up or invest in renovations that will boost a property’s price, and then sell the property for profits. This technique is also called flipping properties. Aside from that, investors can decide to keep the property and generate profits through rental income.
As a property owner, you’re also a landlord, which means you can rent out property to whomever you wish and as long as you wish. Rent is a predictable income, which means you’ll always have expected profits to rely on. Not only that but as a landlord, you’re also entitled to property appreciation, such as tax returns and mortgage interests.
Considerations For Diversified Portfolios
The asset class of alternative investment consists of a variety of assets, each having a unique characteristic. But how to know which one is the best fit for your portfolio. A lot of factors can help you decide this. All you have to do is compare each traditional investment type:
- Liquidity and Time Horizon: Time horizon refers to the amount of time an investor holds for a particular investment. They vary largely from some hours to even decades.
- Industries and Markets: In order to diversify the investment portfolio, opt for investments from various markets and industries. While considering property investments, extend your capital everywhere else.
- Potential Threats & Risks: One of the primary goals of diversification is to spread out the risks. Alternative investments offer different risk factors. Coming back to the time horizon concept, longer investment options are less risky.
Stocks and bonds, although being the most popular investment opportunities, don’t provide the security investors need, especially during global instability.
That’s why alternative investments are becoming increasingly popular. In an effort to diversify their portfolio and secure funds for future use, investors are looking for investment types that can withstand the challenges of an economic crisis.
And it’s a wrap on this article. Comment below and share your thoughts on this. Until then, happy reading!