Are Alternative Investments The Key to Diversification?
Last month, following the Dow’s wild roller coaster ride, I wrote on how wealthtech can help investors and financial professionals make smart investment decisions amid market volatility. Though the markets haven’t dropped to the same low as we saw in March, volatility is ongoing. The good news? There are many types of assets not tied to the stock market!
According to the experts, hedging a portfolio against losses and building wealth is diversification… beyond the traditional stocks and bonds. However, simply adding various mutual funds and ETFs may not actually mean you are diversifying, as many of them may overlap in terms of holdings. So, what options do you have if you want to ensure diversification? I’m not an advisor, but word on the street points to alternatives.
Whether you’re an investor or portfolio manager, you probably should be familiar with alternative investments and the correlation between asset allocation and risk management. (Note: Legally, we can’t expand and provide any investment tips, however, we sure know plenty of investment professionals who can. Drop us a line if you want to connect with an expert, we’re always happy to make introductions!)
Though we can’t offer tips, we can offer insight. Here’s a snapshot of a few of the top alternative investments currently attracting attention:
Cryptocurrencies are the hot, new alternatives in the investment community, and they’re making headlines across the world (especially with this week’s announcement of Bitcoin Cash’s hard fork set for May).
- Not government-backed or dependent upon the central banking system, meaning governments cannot manipulate the currency and inflation of local currencies have no impact on the value of crypto.
- Being accepted by business for payment at increasing rates, especially in ecommerce. On a similar note, we’re seeing more people in low-income countries buy crypto and use it as their primary currency.
- Attracting the attention of governments across the globe and are on their way to gaining the support they need to be adopted by the masses. (E.g. An international blockchain partnership was formed this month by 22 European countries.) Once the industry is regulated globally, public understanding and trust will increase.
People invested in gold before the first stock was ever introduced. It is the oldest investment around and boasts a solid track record.
- Considered a safe haven investment. It tends to have an inverse relationship to the equities market in a correction and derives most of its value from supply and demand factors, unlike assets on an exchange that can fluctuate based on corporate actions, fund management and even technology.
- Known for its historic stability. Its value steadily increases over time, without major downswings. It’s often used to hedge against inflation and is reliable when global crisis and natural disasters strike.
- Unlike assets on an exchange that can fluctuate based on corporate actions, fund management and even technology. It derives most of its value from supply and demand factors.
Real estate investment is one, if not the, most understood alternative. Most of us are continuously interacting with the market to some degree, whether it be browsing prices on Trulia, paying rent each month or selling a home.
Real estate investments:
- Come in many forms – everything from rental properties to REITs.
- Can yield quick returns. Those seeking short-term investments often look to real estate. The most common short-term strategies typically involve buying real estate below market value, making improvements to the property and selling for or above market value.
- Vary significantly based on classification and region. Classifications include: residential (new construction and resale of homes), commercial (includes everything from office buildings to apartments), industrial (warehouses and manufacturing properties) and land (vacant land, land used for agriculture, and deals where an investor buys a property for the land rather than the structure on the property). Typically, real estate is strongest in states and areas where loans are less than the median values in the U.S.
What’s your take on alternative investments? Let us know on Twitter! Our handle is @KCDPR.
(This blog should in no way be construed as investment advice, but is intended to be used for educational purposes only.)