A portfolio with a right mix of stocks and bonds may not be enough to achieve your long-term goals. As an intelligent investor, it’s important to know why alternative investments can offer new opportunities. That’s because exploring investment options beyond the primary assets can spice up the returns column and diversify your investments further. So, here are a few reasons why you can opt to invest a part of your money in alternative investments.
✓ Lowers volatility: Traditional assets like bonds and stocks show strong correlation with economic trends that answers why alternative investments make sense. Market risk for such traditional investments cannot be eliminated completely even after diversification across various sectors, avenues and geographies. In that regard, alternative investments depend less on big market trends due to its illiquid nature. Hence, knowing why invest in alternative investments can reduce the effect of market volatility.
Let’s consider why use alternative investments such as private equity to understand this better. Since you are investing in companies that are not listed and traded publicly, your investment is not directly affected by stock market volatility.
✓ Higher return potential: The goal of alternative investments is to generate higher returns. Unlike traditional investments, there is no competition against a benchmark. Furthermore, since these investments involve moderate-to-high risk, they have a potential to deliver high returns. This is why it is a good idea to know why alternative investments in market can be a good choice in one’s portfolio.
For example, venture capital funds invest in start-ups having high potential for growth. If the start-up starts growing, you can receive massive returns. Similarly, hedge funds can deliver higher returns with reduced risk by trading various strategies across different asset classes – commodities, currencies, equities, debts and derivatives (futures and options, forwards, swaps etc).
✓ Widens Portfolio Diversification: There is a wide range of products in alternative investment space. Investing in them can diversify your investments further. After all, a well-diversified portfolio can deliver better returns to achieve long-term goals. Hence, it makes good reason to know why use alternative investments in stocks as part of your portfolio.
✓ Tax benefits: Since most of the alternative investments are for the long-term, they can provide you certain tax benefits. Private equity and venture capital funds can help you avoid long-term capital gain tax as they invest in unlisted companies. However, it would be erroneous to suggest these investments provide 100% tax breaks. All these options do have certain tax obligations.
To sum up
Alternative investments can diversify your portfolio and provide you refuge from the volatility of stocks. So, if you have a sizeable kitty to invest and the patience to reap reward in the long run, putting it in an alternative investment can be an ideal choice.
The world of alternative investments could also include more confined and niche sectors such as collectibles, fine art and other rarities. These non-conventional investments can play an exceptionally crucial role when conventional investments undergo substantial unpredictability. You may want to consider such options as a potent diversifier along with traditional investments.
To know how to best understand alternate investments and make the right decision call, you may want to look into the services of a financial advisor. Investments experts employ progressive and established strategies that can help you to capture opportunities in the various sectors of alternative investments.
Disclaimer: Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.