Where to start with alternative assets as an accredited investor, and what to do next
Accredited investors often struggle with achieving true portfolio diversification through traditional investments alone.
The limitations of stocks and bonds in offering balanced growth and risk mitigation bring us to the doorstep of alternative investments.
This guide explores how alternative assets can complement your portfolio, addressing the need for diversification and potential higher returns, with a clear focus on navigating the associated risks.
By the end of this article, you will understand:
- The unique characteristics and benefits of different types of alternative investments, and how they can diversify and strengthen an accredited investor’s portfolio beyond traditional stocks and bonds.
- The specific risks associated with alternative investments, including liquidity constraints and valuation complexities, and strategies to mitigate these risks.
- Practical steps for accredited investors to begin incorporating alternative investments into their portfolios, emphasizing the importance of due diligence and aligning investments with their risk tolerance and financial goals.
Understanding Alternative Investments
Back to basics
Ok, imagine you’re planning your financial future, much like strategizing for your career or academic path.
You’re probably familiar with the standard options: putting money into a savings account, buying stocks or bonds, or maybe contributing to a retirement fund like a 401(k).
These are like your core courses in college – essential and foundational. They’re the traditional investments that most people rely on for growth and security over time.
Now, let’s make things more interesting by considering alternative investments.
You can think of these as the electives or the study abroad programs that not everyone takes advantage of.
Alternative assets include a wide range of investments outside of the stock market, such as real estate (buying property for income or appreciation), private equity (investing directly in private companies), hedge funds (exclusive funds that employ diverse strategies to increase returns), commodities (investing in physical goods like gold, oil, or agricultural products), and even collectibles or art.
Why consider these?
Just like adding unique electives or experiences can diversify your education and make your resume stand out, alternative investments can diversify your portfolio and potentially enhance your returns.
They often move independently of the stock and bond markets, providing a cushion when the markets are volatile.
For instance, while stocks might plummet, your investments in some alternative assets could remain stable or even increase in value, balancing out your overall portfolio.
But here’s the kicker – with higher potential returns often comes higher risk and complexity.
These aren’t your beginner-level courses. Investing in a startup through private equity could offer a substantial payoff if the company takes off, but it’s also riskier than buying into a well-established, publicly traded company.
Similarly, hedge funds might use aggressive strategies that can lead to significant gains or losses.
So, you can think of alternative assets as advanced classes. They require more research, a higher tolerance for risk, and often, a larger initial investment.
But, just like those challenging courses or unique experiences in college, they can be incredibly rewarding, offering new avenues for growth and learning in your financial journey.
Types of Alternative Investments
This list is not exhaustive, but it will cover the essentials.
Alternative investments encompass a huge range of assets, each offering distinct opportunities and challenges. Here are some of the most common alternative asset classes:
Real Estate: You can allocate funds into commercial, residential, and industrial properties. This can bring the potential benefits of rental income, property appreciation, and portfolio diversification.
Private Equity: This involves investing capital into private companies in exchange for equity. While riskier, it holds the promise of substantial returns, especially when these companies grow or go public.
Hedge Funds: Hedge funds use pooled funds to employ a variety of strategies to earn active returns for their investors. They aim for high returns and can include leverage, derivatives, and short selling.
Commodities: Investing in physical goods like gold, oil, and agricultural products can hedge against inflation and add another layer of diversification due to their inverse correlation with traditional securities.
Collectibles and Art: Rare collectibles and art can appreciate over time, offering a hedge against market volatility and inflation, while adding aesthetic and historical value to one’s investment portfolio.
Small Business Financing Notes: These investments provide businesses with the capital they need to operate and grow. For investors, these notes offer a way to earn interest income, often at higher rates than traditional fixed-income investments.
While they come with their own set of risks, including the potential for default, they also allow investors to directly support the growth of the real economy and can be an integral part of a diversified investment strategy.
Alternative asset risk profiles
Alternative investments come with their own set of risks, most often liquidity constraints and valuation complexities.
Liquidity constraints mean it can be challenging to quickly sell these investments, and in some cases selling early can incur hefty charges and result in overall loss.
Valuation complexities arise from the difficulty in accurately pricing assets that don’t have a readily available market price, like a complicated loan for example.
To mitigate these risks, you can diversify even within your alternative asset investment allocation to spread out potential risks across different asset classes, businesses, regions, and time scales.
The small business finance notes offered by our partner Supervest mean that you gain exposure to thousands of different small business finance deals across industries, locations, and premises – all within one note. In effect, this compounds the diversification and risk-reward spread potential.
Regularly reviewing and adjusting your investment strategy can also help manage these risks effectively, ensuring your portfolio remains aligned with both your short-term and long-term financial goals.
What next?
You can start exploring alternative investments by thoroughly researching each asset class and understanding their unique risks. This will take time, and that’s ok.
Partnering with trusted, transparent investment platforms with a proven track record can take some of the pressure off you here.
You might want to look for professional advice from financial advisors or investment managers to align these opportunities with your financial goals and risk tolerance.
Alternatively, you might be more of a self-starter and prefer to research and build your understanding with resources you find yourself.
Either way, a proactive approach will pave the way for a diversified, robust portfolio, setting the foundation for sustained growth and wealth preservation in your investment journey.
Supervestor will be here to support you, every step of the way.
