Since the downturn of the stock market, many investors have begun exploring alternative investments. Who can blame them? Alternatives offer better returns in shorter periods of time. However, those benefits come at a price. If you’re going to consider alternative investments, it’s best to consider them as a means of diversifying your portfolio. In other words, you don’t want to replace your safest investments with risky alternative investments entirely, but if you’re looking for greater gains on the short term in order to maximize your long-term gains, then some alternative investments can help you allocate your assets more effectively.
Why These Alternative Investments are Risky
Here’s a look at three of the more risky alternative investments:
- Virtual Currencies — Virtual currencies like Bitcoin can look promising, and they’re novel enough that young investors may consider them attractive. However, it’s not likely that these currencies will ever replace national currencies entirely. They’re also not issued by any bank, nor do they have any backing from a well-financed financial institution. And you’re never going to hold one in your hand. All of these factors make virtual currencies risky investments because it’s impossible to predict how or whether they will hold their value.
- Business Startups — There’s something exciting about putting your money into an initial public offering only to find the company that issued the stock be worth billions of dollars in a few years. Early investors in Microsoft are sitting pretty today. But bear in mind that these success stories, while they do happen, are rare. It’s hard to pick winners with startups because so many factors determine the success of a company, and all of them are out of your control. Statistically, four out of five IPOs trade below their initial price within the first five years of life.
- Commodities — Commodities are often prized for their ability to diversify a portfolio, but if you aren’t familiar with how the commodities market works, you can lose a lot of money. True, they can be a hedge against inflation, but they are often quite volatile and are known to experience huge price spikes and dips within a short period of time.
One Less Risky Asset Class You’ll Really Like
Real estate is often considered a risky alternative investment, as well. However, they’re not going to make more of it. This scarcity means that, over time, real estate values have increased. One caution: If you’re thinking of using your primary residence as a real estate investment, think again. Separate your personal assets from your investment assets.
Real estate crowdfunding (RECF) is somewhat different than investing in real property. it’s a great way to diversify your portfolio without the downside of long-term holding, which is less liquid than many investors like. With RECF, you can invest in short-term projects that deliver a return on investment (ROI) throughout the term as well as a lump sum return on the back end.
Another benefit to Real estate crowdfunding is that you can get in for as little as $1,000. That means you don’t have to tie up large sums of your assets in an illiquid investment that won’t pay you returns for years.
As with any investment, if you’re thinking of opening a real estate crowdfunding account, study the market before you invest. Don’t go too far in too fast. In fact, use RECF as a vehicle for allocating your assets more widely to hedge against potential losses across your entire portfolio. Alternative investments can be rewarding if you approach them with a cool head. In other words, sit on the sidelines before you make an investments. Sleep on it for 24 hours, enjoy a 30-day cooling off period so that you can study the market and the platform before making your first investment.