Alternative Investments Opportunities

I don’t know of anybody who hasn’t been affected by the financial turmoil we have seen over the last couple of years. If you have any wealth at all then you will have seen some effect. This has made people think more about their investments and start seeking out other alternative investments.

The reason that people are looking for alternative investments is that returns aren’t really correlated with the returns on normal assets. You are more protected if we see another financial crisis and let’s face it, we probably will eventually. You get that extra diversification which is missing from other assets.

So why is it important to diversify? If you had your money tied up in traditional asset such as property, stocks, bonds and cash then you are likely to have done poorly over the last few years. The stock market has performed poorly for even longer as it is lower than it was 10 years ago. Cash too is likely to be losing value in real terms.

I am not saying to blindly invest in alternative investments such as art, antiques or stamps etc. There are disadvantages and I will talk about these. You need to think about it as an option.

Would you like to hear some of the disadvantages? There isn’t an active marketplace which means that it isn’t so easy to offload your investment when you want. With the stock market you know you will be able to off load your shares. It isn’t the same here. If you have to search for one then this adds to your costs.

If you have a market where there aren’t many transactions you are unlikely to get a fair price. You won’t have a lot of data for you to see what has been happening with the price. This means that if you want that information then you will have to get it yourself. You will find that errors creep in as it is subjective. If you do it well though there can be huge potential in alternative investments.

Alternative Investments Drawbacks

How have your investments done over the last few years? Unless you are part of the small few that saw the financial crisis coming then your investments are likely to have done poorly. Many others are in a similar situation and they are seeking alternative investments for wealth preservation.

Many of the normal asset prices tend to move in the same direction.e. they are very correlated. This means that when one goes up the other does. They also often fall as the same time as well. Alternative investments don’t really have this relationship. They allow you to have proper diversification in your investment portfolio.

As we know, many traditional asset classes have not performed well which increases the need to diversify into alternative assets. Shares haven’t performed well and if you look at it from a decade long view the performance is dire. Property prices are still in decline and the value of cash is falling in real terms. Now is the point when you need alternatives.

Alternative investments are not the be all and end all (not by a long shot). Investments in stamps, antique furniture and works of art can go wrong. It is something that you need to keep in mind.

The biggest disadvantage is the stock market’s big advantage… liquidity. It can be risky investing in a market with a lack of liquidity because even though the asset might have risen in value you may not be able to sell and lock in the profits when you want. You might not be able to offload your items when you want if there are no buyers to buy.

In a market where there aren’t many buyers and sellers it is hard to establish a proper price. Lack of data also presents a problem with analysis. It may require you to do some work in order to establish reliable data for the market. If you are putting extra effort in then you should demand a larger return for it. However this also presents opportunities in the alternative investments market in that if you know the correct price you have the advantage.

Alternative Investments Benefits

Many people have suffered large losses as a result of the financial crisis. These large losses have made people seek out alternative investments as a way of protecting themselves. These investments do themselves come with risks and we will be looking at some of these today.

Why are alternative investments a good idea? Well many of them have a low correlation with traditional assets. This means that if the price of one asset goes up then that is unlikely to feed through into other assets. You have better chance of maintaining your wealth as you have a further element of diversification.

I really want to emphasis the importance of diversification and how alternative investments can help you achieve it. Traditional investments such as stocks, property, bonds and cash have performed badly on average. The stock market is less than its value 10 years ago. There have been housing bubbles popping as the credit dries up and interest rates are so low that the real value of cash is in decline.

I am not saying that you investing in alternative investments is always a good thing. You just need to be open to the idea. Investments in stamps, art, antiques and other collectables have some disadvantages which we will go through now.

Are there any drawbacks? Well firstly the market tends to be quite illiquid. If you decide you want to sell you can’t just call up your broker and arrange a deal. If you need to change your position quickly then you might not be able to do it.

A further disadvantage of alternative investments is the lack of data required to establish a price. Where the market is small it often struggles to agree on a fair price for an asset. If you are the person who hasn’t got all the information available to you then you are likely to be on the wrong end of the deal. Mind you, if you know your stuff then there are huge opportunities there for you.