An alternative investment refers to any type of investment that is outside of the normal investment realm such as stocks, bonds, and cash. These investments include real estate, commodities (such as gold and Bitcoin), asset-based financings and many types of private placement securities (commonly called hedge funds). Alternative investments can be an appropriate addition to certain investment portfolios; this is a topic you may want to raise with your financial planner to see if certain alternative investments are appropriate for you.
They Are Too Risky
Due to alternative investments involving various asset classes, they tend to be associated with more risks. It is true that some alternative asset classes can be riskier than others, but there are also some that have proven to be very safe. One, in particular, is asset-based lending backed by underlying collateral that can be redeemed through a loan default. The success of these investments comes in the due diligence of the investor. If they are thoroughly reviewed, investors can earn higher yields without the chance of taking higher risks. Many alternative investments also experience less volatility than the stock market.
Alternative Investments Are Only For The Very Wealthy
History has shown that alternative assets were reserved for the very elite class. However, recent legislation has opened the door for other investors. For example, the 2012 JOBS Act made it possible for platforms like YieldStreet to offer alternative investments to accredited investors. These regulatory changes are leveling the playing field and permitting a broader community of investors to access these new opportunities.
Alternative Investments Are Highly Illiquid
Many of the traditional options that offer alternative portfolios lock investors’ funds in fifteen-year windows. These opportunities are typically meant for people who are confident they will not need their money for an extended period of time. This is the case for some alternative investments, but not all of them. Some alternative assets yield shorter investment terms. For example, YieldStreet offers asset-based financings that are generally set on one to three-year terms, so investors have more financial flexibility.
Alternative Investments Do No Protect Investors During Market Downturns
During periods of high market stress, most investments do tend to converge under pressure. Unfortunately, this is the case for almost anything you invest in. However, history has shown that even during crises, alternative investments do not fall as far as stocks, so investors have more of a cushion with their investment.