More surprising investment choices outside the traditional world of stocks, bonds and cash
There are several important components that make up an investment portfolio. Most people think of three main asset classes – cash, stocks and bonds. However, there are alternative investments – also known as unconventional asset classes – that get overlooked. In order to be able to understand these strategies and asset classes, an investor must first know how traditional assets work.
Stocks and bonds
Stocks and bonds are extremely common in the investment environment. Stocks in particular, are better known as equities. When investing in stocks, you basically own a part of a company. Investors become shareholders and they participate in the development (success or failure) of that company. Bonds on the other hand, are a loan and the holder is the lender. Two major components make up a bond – interest and principal. The principal is the borrowed amount whereas the interest is the amount received by the bold holder. Bonds usually provide investors with a bi-annual interest. The loan’s length can vary from a couple of weeks to tens of years. Conventional bonds are better known as core bonds, and often consist of investment grade bonds that come from major corporations.
Why alternative are better than conventional investments?
Many investors wrongfully believe that alternative investments are risky. To some extent, they are mysterious and exotic; but that doesn’t necessarily mean you should avoid them. Truth be told, alternative investments comprise a range of asset classes. The goal is to help an investor boost returns, thus diversifying their portfolio and providing more leverage. It’s certainly worth having a closer look at some of the best alternatives. Before getting into the nitty-gritty of alternative investing, let’s have a closer look at several common misconceptions.
- Many believe that alternative asset classes are new, exotic and untouchable. They’re not! In fact, they’ve been populating the investment industry for decades. Hedge funds for instance, have been around since the 40s, not to mention that people have been investing in wine since the 80s.
- The daredevils of the financial industry: another misconception surrounding alternative assets is centered on their level of risk. While it is true that they’re unique and unusual, this doesn’t necessarily mean that there’s no chance at a return on investment. In fact, because the strategies are so unique, an investor has greater chances to leverage an asset and make it more valuable. They might be designed to provide risk adjusted performance, but they can be just as profitable as conventional investment choices.
- A third misconception about alternative investments is that they maximize a portfolio’s overall level of volatility. Historically speaking, alternative possess a low to medium correlation of returns compared to traditional investments; spicing things up and diversifying a portfolio based on traditionals can actually reduce volatility.
Thinking outside the box
Nontraditional investments are made of noncore bonds, real estate, commodities, fine wine, art, and more. Noncore bonds for example, may be seen as riskier than usual bonds because they fluctuate more often. However, to compensate for the risk an investor takes when making an investment, noncore bonds feature higher interest rates. As for commodities, these are physical items with an economic value just like gold and oil. As opposite to bonds and stocks, commodities don’t have a claim for a continuous revenue stream; as an alternative, the value is derived from their use.
As far as wine is concerned, increasingly more investors are looking to invest in this alternative asset class because of an increased demand and limited supply. Top regions in France, Italy, South Africa and the US (California) are producing the best varieties; top-tier wine cases are the rarest and also the most sought after. And since wine takes 10-20 years to reach maturity and increase in value, many investors are willing to wait to see returns. The fine wine industry has expanded to countries in Asia and the Middle East as well, which can only mean that more and more investors are looking to buy and sell wine.
Bottom line is there is a wealth of options available when it comes to investing for profit. However, the market is not limited to traditional asset classes. Alternative investment options are equally viable and profitable, as long as you don’t take unnecessary risks.
By Fredrick Cameron and WineInvestment.com!