Looking to add Alternative Investments to your Portfolio? Keep reading…
A study by Morgan Stanley revealed that 77% of millionaire investors owned properties, making it the alternative investment of choice. One-third of the surveyed millionaires aim to buy more real estate properties.
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It’s therefore no surprise that financial pundits are all talking about alternative investments these days. But what does “alternative investment” mean, exactly? How does it differ from traditional investments?
Alternative Investments: A Definition
An alternative investment is simply the blanket term used to refer to asset classes that do not fall under the traditional investment options, such as stocks and bonds. Some alternative investment asset classes include managed futures, commodities, penny stocks, private equity (See: OTC), direct property ownership/real estate, options strategies and cryptos.
The interest in alternative investments grew after the shocking economic recession of 2008, which caused investors to seek less volatile investment options. In contrast to traditional investments, alternative investments are much less prone to market volatility, which guaranteed steady growth and returns.
The Return of Real Estate Investment
The interest in real estate and direct property ownership grew directly due to the upheavals of 2008. With financial pundits concerned over the declining interest rates of stocks in the next few years, investors are looking towards steady growth in real estate. More importantly, real estate is less volatile.
The year also shows a potential increase in property interest rates, so 2014 is the banner year of investing in property. At present, the lack of development in traditional asset classes has led to greater interest in the promises of real estate. Investors can look forward to value appreciation and the steady influx of rental income. For those seeking an escape from volatility, real estate investment is an understandable alternative.
However, it’s important to point out that the current interest in real estate will eventually drive up prices. The resulting pressure on the property market can be a challenge.
Other Alternative Investment Classes
Apart from real estate and direct property ownership, you can choose from other forms of alternative investment classes. The problem is that each asset class is a challenge in itself, especially for investors who are already used to the relative simplicity of traditional investments.
For investors who do not have the time or skill to study these alternative instruments, the best option is to find a trustworthy advisor who can quickly sum up the strengths and weaknesses of every asset class. This way, identifying the alternative investment instrument can become much easier.
- Read more: Reallocate your portfolio strategy.
It’s also a good idea to seek transparency through curiosity and clear communication. Investors can no longer rely on principles learned from investing in traditional asset classes. Learn to ask questions. There should be no holds barred.
Problems of Alternative Investments
Alternative investments have a few potentially problematic issues.
- Higher tax rates. Alternative investments may incur higher tax rates, a factor that could discourage many investors.
- Lack of transparency can be a problem. As mentioned, information is crucial where alternative investments are concerned.
It takes a significant amount of time and effort to decide on the right vehicle. Given that some of the asset classes function very differently from traditional investment options, investors can find themselves blind-sided or kept in the dark.
On to the Future
Despite some of its pitfalls, alternative investments look to be quite the star for 2014 and onwards. The fact that these asset classes offer less volatility than their traditional counterparts is more than enough to ensure constant investor interest.
In fact, alternative investments already are the focal point of investment portfolios for retirees. The low volatility of these classes makes them perfect for long-term wealth management with steady returns. Whether or not the popularity of real estate will continue, the interest in alternative investment classes will continue and will not wane for as long as low volatility is a possibility in this post-financial crisis world.
💡 If you would like to learn even more about your investment portfolio, read this article, “Investment Portfolio Basics: It’s All About You”.