Insights on the Advantages and Disadvantages of Unconventional Financial Ventures You Should Consider
Swapping traditional investments for a bit of the unconventional? That's where alternative investments come into play. Unlike stocks, bonds, or cash, these bad Boys (and girls) offer a dynamic twist to your portfolio. Here's the lowdown:
The Juicy Benefits of Alternative Investments
1. Performance Boost: Alternative investments could be your ticket to performance perfection. Although they don't guarantee sky-high returns, some outshine traditional assets.
Take, for example, the energy market boom post-Covid-19. The coal art boomed, raking in 160.61% returns in 2021. Meanwhile, oil and gas scored 55.01% and 46.91% in gains, respectively. Private equity funds also have the potential to deliver whopping returns, like posting up to 54% in 2011. That's 12% higher than the public stock market!
2. Diversification Party: Investors can't resist the allure of diversification, and alternative investments are the life of the party. Historically, these assets have shown low correlation with traditional investments in the long run.
Let's take a gander at the Bloomberg Commodity Index, which tracks global commodity prices. It's only about 0.3 correlated with US equities, tracked by the S&P 500 Index. Similarly, the commodity index clocks in at about 0.3 in correlation with global bonds, tracked by the Barclays Global Aggregate Index.
3. Volatility Reduction: The low correlation between traditional and alternative investments means we can create a less volatile portfolio and improve our risk and return profile. In times when traditional investments falter, our portfolio doesn't take a significant hit.
The Dark Side of Alternative Investments
1. The Illiquid Market: Alternative investments can be downright challenging to sell, making it difficult to decide on pricing. We might find it tough to pinpoint historical performance before investing.
2. High Minimum Cost: Like a high maintenance pet, alternative investments can demand hefty entry fees. These assets are generally unregulated, unlike stocks and bonds.
3. Forming the Ideal Portfolio: Not every alternative investment is created equal. Choosing the right type (commodities, real estate, hedge funds, and more), selecting a portfolio manager, and determining how much to invest can be a complex puzzle.
4. High Returns, High Risk: You know what they say: no risk, no reward! While alternative investments can boost portfolio performance, they also come with a high risk of loss.
5. Illiquidity: Many alternative investments, such as private equity funds and real estate, are generally less liquid. This means it can be difficult to exit an investment or sell it at any given time.
6. Low Price Transparency: Unlike stocks and bonds, alternative investments don't boast a public market. Finding reliable pricing information can be a struggle.
7. High Cost: Turns out, alternative investments can be costly. Fees vary widely between types, with hedge funds charging as much as 2% of the total investment and retaining a percentage of excess returns.
8. High Minimum Initial Investment: To dive into the world of alternative investments, you'll often need deep pockets. For instance, a private equity fund may require $25 million as a minimum investment, although smaller minimums do exist.
Dive Deeper
- Alternative Investment: Characteristics, Types, Investors, Pros, and Cons
- Real Estate: Meaning, Types, How to Invest
- Venture Capital: How It Works, How It Makes Money, Investment Horizon
- Hedge Funds: Examples And What Do They Do?
- Hedge Funds Strategy: Macro, event-driven, relative value, and equity hedge strategies
- What Are the 3 Stages of Venture Capital Financing?
- Common Stock: How it Works, Types, Features, Advantages, and Disadvantages
- Private Equity: Examples, Strategies, Targets, Its Ways To Make Money
- Exploring Alternative Investments: An Essential Guide
1. With an eye on achieving superior returns, investors might find it beneficial to consider alternative investments like private equity, real estate, or commodities, as they have the potential to deliver higher yields than traditional investments, such as stocks or bonds.
2. While alternative investments offer diversification benefits, reducing the overall portfolio volatility, they also come with their own set of challenges, such as high costs, illiquidity, and low price transparency, which must be carefully weighed against the potential rewards.
