Warren Buffett said in an interview for CNBC’s documentary “Crisis on Wall Street: The Week That Shook the World” that “it is human nature to want to make investments when markets are going up.” Just before the last financial crisis hit the global economy, stockmarkets had risen considerably with very few people predicting the crash that followed. Unfortunately for most the crash came and many lost vast amounts of money. Economists are debating if alternative investments could provide a solution for this type of downturn.
An alternative investment is a financial asset that does not fall into one of the categories of traditional investment. Stocks, bonds and cash are the traditional types. Because of their complex nature, lack of regulation, and degree of risk, most alternative investment assets are owned by institutional investors or qualified, high-net worth individuals. Alternative investments include private equity or venture capital, hedge funds, futures controlled, art and antiques, commodities, and contracts for derivatives. In addition, real estate is often listed as an alternative investment.
Usually, alternative investments have a low correlation with traditional asset classes. This weak correlation also means that they pass counter to stock and bond markets, or the opposite. This feature makes them an effective tool for diversification of portfolios. Strong asset savings, such as gold, oil, and real estate, also provide an important hedge against inflation that hurts paper money’s purchasing power.
Most investors are looking for other ways to invest in addition to the stock market as they increase their wages and generate more income. It’s a smart way to diversify and find other ways to build wealth from the uncertainty of the markets. Nonetheless, you should be careful about how much you spend in alternatives, as with any company. You should start small to limit your losses and diversify as you would with stocks and bonds, your alternative assets.
Alternative investments are often mistaken. Many creditors still see alternatives as high-risk, exotic funds reserved for individuals and institutions that are ultra-high-net worth. The truth is that alternative investments can be an integral part of the portfolio of almost any investor. While some alternative investments can experience higher levels of volatility than traditional stocks and bonds, as a group, alternatives are no more volatile than any other investment. In fact, many alternatives experience far less volatility than the stock market. Alternatives are different approaches to investing across a wide range of markets and asset classes. A helpful way of thinking about alternatives is to distinguish between their “contents”–the assets or strategies that decide how individual investments can be expected to perform–and their “containers,” the structure of the fund that will dictate liquidity and access to capital.
If an investor would like to diversify his portfolio and safeguard it from market downturns, alternative investments are the solution to the problem. Whether it is antiques, whisky, classic cars, gold or even a rare designer handbag, an alternative investment may have a high return on investment rate that you would never imagined.