Sometimes, it can pay off to think outside the investing box.
Most of us, when we think of investments, immediately turn to stocks or bonds. These are the basic building blocks of most investment portfolios. Indeed, most of us consider a traditional asset allocation of stocks and bonds (start more stock-heavy when you're young and switch to bonds as you approach retirement) to be the best way to go.
Hedging against risk in a more traditional portfolio with a more traditional asset allocation usually involves using diversity, and making use of low-cost mutual funds/index funds and ETFs. However, not everyone loves the more traditional portfolio. As some people learn more about money and investing, they start to wonder if there are some alternative investments that can do just as well as — or better — than the traditional portfolio.
What are Alternative Investments?
The definition of “alternative investments” varies according to the person you ask. For our purposes, I'm going to say that traditional investments include:
- Cash products
- Real Estate
I'm including commodities and currencies on the list (even though they are often considered alternative investments) because, even though most regular folks aren't that interested in pursuing them as investments, most of us still view these asset classes as part of the investment landscape. Plus, you can invest in commodity ETFs and currency ETFs if you are interested in dabbling a little.
Alternative investments are those that fall outside these asset classes. They are investments that include items that may not be as liquid, and that have a value that is even more subjective than many of the more traditional asset classes. If you think that the US financial system is on the verge of collapse, you might decide that hoarding pennies and hoarding nickels might be of value — in addition to hoarding gold coins.
Other alternative investments might include collecting things like sports cards, limited edition action figures, and artwork. In some cases, alternative investments include different types of investments related to traditional investments. You can find stock options, as well as derivatives, and these are often considered alternative. (Next week, I'm going to look at poker as an alternative investment.)
Is it Wise to Pursue Alternative Investments?
One of the issues that many have with alternative investments is that it can be even more difficult to determine whether or not your investment will yield something more. Alternatives that involve precious metals have the potential to gain in value as the US dollar loses value, and many people prefer them because they are tangible.
Other investments are made with more sentiment than true evaluation of possible gains. Collectibles are a prime example. Unfortunately, your collection is probably not likely to be worth a lot. My husband's Lord of the Rings collectibles probably won't evolve into paying for our retirement. If you invest in artwork, you never know when the art market, or tastes, are going to change. You could spend money on an “emerging artist” only to have that artist go no where.
Of course, if your alternative investment appreciates a great deal, then it pays of big in the long run. However, you might have to wait a long time for it to pay off.
Even though all investments are basically subject to the whims of the market, and investor perception, alternative investments seem to carry more risk in a lot of ways. Before you invest in anything — especially alternative investments — make sure you can afford to lose the money you plan to invest, and take the time to understand how the investment works, and what factors influence its value.
Image source: Jolle via Wikimedia Commons