There’s more to investing than just stocks and shares.
Most of us are familiar with the stock market. But have you ever wondered what the organizations and high net worth identities are investing in? Alternatives.
So, what are alternative investments, what advantages does it offers, and if there are any drawbacks?
Siby addresses all of that here in this article, as well as elaborates on some of the most common alternative investment opportunities that individuals can invest in–and not only the wealthiest.
Siby Varghese is one of the most well-established entrepreneurs, wealth consultants, and portfolio managers. He has been involved in the market for more than 10 years. He follows the investment approach that favors businesses with strong management credentials and procedures. Within a short period, Siby has mastered the in and out of the market and became an expert. With his absolute determination & hard work, he did a lot of right things in his career that fetched him the identity of being one of the most influential entrepreneurs of today’s age.
What Is An Alternative Investment?
First, simply put: alternative investments are an additional type of investment that cannot be invested in through the stock market or 401ks. This essentially implies they are anything other than stocks, bonds, or cash reserves.
Oftentimes alternative investments can have a reasonably high buy-in level. And this makes them highly attractive for high-net-worth individuals and qualified investors. Diversifying your investment portfolio is the central appeal of investing in alternative resources.
The idea is that a successfully diversified portfolio can be very efficient in shielding an investor against future hits due to market fluctuations when executed right.
Advantages and Drawbacks of Investing in Alternatives
Just like any other investment, investing in alternatives has its advantages and drawbacks.
It is essential to assess whether or not one of these non-traditional alternatives fits with your risk tolerance, investment schedule, and ultimate objective.
Alternative investments can offer investors security, diversification, and better than average returns. Another value is that they also have complex legal and tax conditions that can be heavily leveraged.
With potential tax benefits, alternatives enable individuals access to investments that were otherwise off-limits. Many options were once limited to the rich and corporations, and individual investors now have access to these modern and advanced investment instruments.
The possibility for higher risk and loss, lack of accountability and control in certain situations, access, accreditation standards, and illiquidity can be the drawbacks of alternatives investment.
Not all alternatives are illiquid, however, many are more compatible with a long-term investment approach. It is important to note that all of these drawbacks can be resolved with the right analysis and collaborating with an SEC-regulated partner.
Pros –
- Potential tax advantages or sheltered cash flows.
- Less competitive markets can lead to opportunities.
- Intellectual and emotional contentment.
- Hedge against inflation & ROI.
- Balances out other undervalued investments in the portfolio.
Cons –
- The probability of negative consequences of taxes.
- The lack of accountability contributes to substantial hidden risks.
- More complex investments
- Illiquid
- Difficult to value
Some Choices For Alternative Investment Opportunities
Real Estate
One of the finest tangible real estate portfolios and alternative assets. You are familiar with it whether you buy a house or rent a home! For reasons other than personal use, investing in real estate may be as easy as buying a home. In certain types, real estate falls in and there are many options to invest in it. There are various forms of real estate, such as residential, retail, commercial, and industrial space. Real assets such as real estate can be directly obtained by a Real Estate Investment Trust, also known as a REIT (fix and flips, rental yields, or commercial assets) or implicitly.
Private Equity
Private equity invests in businesses that are not publicly listed. As long as they wait for the private equity firm to sell the holdings in an initial public offering or sell to a strategic bidder or in a transaction, investor capital will be scarce for as long as 10 years, Siby notes.
Transparency is a challenge since investors often commit to investing in a blind pool and would not realize what the enterprise is until the investment is identified by the manager.
Venture Capital
Venture capital is a sub-category of private equity. It invests in early-stage firms that have an outsized growth opportunity, or are aiming to develop quickly in a new or creative setting. As all of these firms do not yet have sales or earnings, there is a high risk of loss, but once a corporation succeeds, there is also a high incentive.
Siby says private equity and venture capital can enable investors to make calls for capital.
An investor can contribute $200,000 to a fund, but over two years, the executives take it in $50,000 tranches. They will incur huge fines if investors do not have the allocated funds available when the manager needs them.
You have to be equipped to have it incorporated into your financial strategy as though you’ve already invested the whole amount, he adds.
Hedge Funds
Hedge funds in the alternative investment ring are a reasonably essential tool to have. They are a great way of increasing the prospects of a good investment return. The probability of making a positive ROI increase by pooling funds from multiple investors and distributing investment dollars around in different asset groups.
There are fewer limitations on hedge funds because they have a larger investing incentive range.
Hedge funds tend to have a very steep barrier to entry, much as certain other types of alternative investing. Buying into a hedge fund will always amount to at least $500,000. Combined with their risk factor, this entrance fee makes them a potentially very fruitful prospect for investment. But it’s also something that you should weigh heavily, explains Siby.
Commodities
Commodities refer to resources that are naturally derived. They are so wide-ranging that they fall into three categories: agriculture, metal, and energy. Consider products like beef, cotton, sugar, maize, natural gas, chocolate, gold, silver, and so on as you think of commodities. Usually, the purchasing and selling of goods are conducted by futures contracts. Via numerous instruments, such as commodity futures, ETFs, or investments of mining companies, everyday investors may gain exposure to commodities.
Tangibles
Commercial property, gold, artwork, antiques, coins, collectible vehicles, etc. can be typical tangible investments. Because of their physical shape and inherent value, buyers are drawn to these investments. It’s a different investment from the stock market’s “paper assets” you own. Tangibles are special as the fact that they include functionality (a home), fulfillment (a car you have), and the opportunity for satisfaction (the sale of the tangible item).
Conclusion
It’s a good idea for investors to allocate a proportion of their investments to alternatives because of their opportunity for strong returns, diversification, and mitigation from current market fluctuations.
There is no wonder that with the continued need for more of these investment opportunities, we will begin to see businesses bringing alternative investments to the regular investor, says Siby.
For more insights into the related topics visit – http://www.sibyvarghese.com/ .