The term “alternative investments” might sound a little shaky and risky, but alternative investments range from the rock-solid to the outright gamble. Simply put, alternative investments are any form of investment that doesn’t fit into the categories of stocks, bonds, or cash. Needless to say, that covers a wide range of investments, from traditional choices like physical property to high-tech newbies like cryptocurrencies. We take a look at some of the alternative investments that are popular today as well as their risk profiles, pros and cons.
Bitcoin, the name that is on everyone’s lips, is by far not the only cryptocurrency that’s out there. Prospective investors should regard crypto as a volatile investment that can gain or lose value with astonishing rapidity. It is therefore not for the risk-averse and is often considered by the conventionally minded to be more of a gamble than an investment. Nevertheless, there are those who have made gains through the buying and selling of cryptocurrencies.
To get started, you will need a bitcoin wallet from which you can transact, and if you plan to speculate in more than one cryptocurrency, you should ensure that your crypto wallet can be used across cryptocurrencies.
In general, bitcoin and other cryptocurrencies are not taxable in themselves, but as soon as you realize any profits in conventional currency, the amounts are subject to tax. Before investing, be sure that you are aware of the legal requirements regarding cryptocurrency trading that are relevant in your country. There are even countries in which virtual currency trading is illegal.
Although real estate may seem like a conservative investment option, it also falls within the defined range of alternative investments. However, established and safe as it may seem, investing in properties can be a minefield. Before you choose to buy a property as an investment, you should do a great deal of research into property value trends and decide how you plan to make your money – through resale or rental.
If you hope to gain income from rentals, factor in the cost of property taxes, property management, routine maintenance and so on. Although property is generally a fairly safe investment, you should be in it for the medium to long term. Buying to “flip” can be a risky business. Even when risks are low, many physical property investments are “lazy” investments that don’t yield gains as great as those to be had from conventional investment vehicles.
Having said that, rentals do offer a fairly predictable income, and commercial properties or apartment blocks can offer a steady and reliable income stream.
Collectibles and Artworks
Buying items like antiques, artworks or other collectibles to sell later on can reap rewards. Sometimes, people seem to be willing to spend vast amounts of money on the strangest things. For example, issue one of Action Comics, featuring an introduction to Superman, fetched 3.2 million dollars on eBay.
However, if you choose to go this route, you will need to know the market very well, and be aware that theoretical worth and actually being able to sell an item for its supposed value are not always the same things. On top of that, there’s also the risk that goes with any form of physical asset that can be lost, destroyed or stolen.
If you enjoy collecting as a hobby in its own right, your pastime may yet bring you rewards, but it should be regarded as a hobby first and a potential investment last.
Gold and Jewelry
Many people see jewelry as an investment, but doing so should be approached with caution. Remember that jewelry is bought ready-crafted and at retail prices, and when it is sold, one is most likely to realize less than the trade or wholesale value of the precious metals and stones. Jewelry is best prized for its sentimental value, but this value can seldom be translated into profits.
Simple gold coins such as KrugerRands may represent a better investment, but although gold has recently reached record highs, its growth in value over the decades has not been great and the gold price has seen volatility.
Although some gold-traders tout gold as a “Crisis commodity” that will still hold its value in the face of collapsing economies and stock market crises, it should be remembered that when times are tough, selling gold at any price will be equally tough!
Private Equity or Venture Capital
Buying shares in unlisted businesses or being ready to provide capital to new ventures can be profitable, but like many forms of alternative investment, it’s risky. If the company should fail to perform as well as you had hoped, or worse still, face closure, you will either fail to gain any returns or be unable to recover your investment capital in its entirety.
If you decide to take this route, you can improve your chances of success by examining the track record of founders and directors, and you should study the business plan impartially.
Pros and Cons of Alternative Investments
Alternative investments can help with diversification across asset classes and, under the right circumstances, they can act as a hedge against inflation. However, it can be difficult to place a predictable value on many alternative investment vehicles, and some of them, particularly property, which can be valued, are nevertheless illiquid and take time to realize cash from. Lack of regulation and a high risk profile are additional disadvantages attached to certain alternative investments, although it should be remembered that in many instances, high risk and the potential for high profitability often go hand in hand.
Spreading Risk: It’s all About Balance
Your willingness to take a gamble on a higher risk investment, or an alternative investment will largely depend on your age. The young can still recoup losses and come out ahead, while older people are more inclined to seek secure investments that can be relied on during their retirement. This can be seen in alternative investments too, with young people being more open to cryptocurrencies as a potential vehicle for profit, while older people would lean more towards real-estate ownership.
Ultimately, however, an all-your-eggs-in one basket approach is to be avoided. Spread risk by choosing conventional investments that span all the asset classes and consider whether a few unconventional investments added to the mix may offer you greater diversification and a better chance of retaining value when conventional markets are going through a bad patch.
In closing, knowing the difference between investing and gambling is important. Even conventional investments can be treated as a form of gamble when a short-term mindset is adopted. True investment is a long-term strategy and not a matter of buying and selling at the drop of a hat in the hope of beating the odds.