Alternative Investments: Cryptocurrencies, REITs & Commodities

 

It's pretty fair to say that the world of investments is a bowl of opportunity. In it are countless people of all stages of experience trying to make some money and trying to achieve success via multiple means. There are conventional ways that may be familiar to you and they include the likes of stocks and bonds.

 

Alternatives do exist and by the heading, you can tell that a deep dove into them is coming. Alternative investments as a whole are a fascinating concept and the fact that they can be seen as just as popular as stocks should garner more attention. So, let's get into it.

 

Contents:

- Getting into basic details

- How do they work?

     -Minimum investments

     -The correlation aspect

     -Regulation aspects

     -The liquidity aspect

- Their benefits and drawbacks

     -Pros

     -Widening the portfolio

     -Lack of a connection to the market

     -Historical performance

     -Cons

     -Lack of liquidity

     -Regulation issues

     -Management difficulty

- Final thoughts

Getting into basic details

As implied in the earlier statements, alternative investments, also referred to as alts are points of interest that stray from traditional types. While convention focuses more on stocks and bonds, let's look at the following:

- REITs

- Cryptocurrency

- Commodities

- Hedge funds

- Art

Basically, alternative investments are diverse with various sectors to focus on, with each one being pretty specific and falling into a niche. If you're looking to widen your portfolio, investments in any of the above areas are the best way of going about it. This definition alone makes them quite distinct from their traditional counterparts, although some of the other key differences will be discussed below.

 

How do they work?

The mechanics surrounding this style of investing are rather complex and as a result, are usually handled by investment groups and wealthy individuals. Said individuals have to face each complex area which is quite risky, but if done the right way, can more than work. The following are the main aspects of alt investing:

 

Minimum investments

One thing you should know is that a heavy emphasis is placed on the minimum investment model, which comes with high fees. Despite this, transaction fees are considerably lower than those of mutual funds, for example, which can be a mixed bag because data becomes difficult to authenticate.

 

The correlation aspect

Alts also have little connection to typical investments and are not subject to volatility. As such, commodities like crude oil and precious metals aren't going to lose value drastically. In fact, the opposite is often true, which means that their value is maintained, giving them the "hedge" status.

Regulation aspects

Stocks and bonds are easy to regulate because of the presence of the SEC. The same is actually true for alts, but registration isn't really a thing, which is probably why those at the top are the ones able to make such ventures. In the case of cryptocurrency, however, regulation of any sort is quite far away from being anything concrete.

 

​​The lack of standardization and clear definitions for different types of cryptocurrency assets today, for example, can further complicate regulatory efforts. This can create a more risky environment for investors, as there is a higher potential for fraud or other illegal activities to occur. So you have to be attentive here.

 

The liquidity aspect

Liquidity is something that alts lack to an extent, especially when compared with their standard counterparts. This applies to all alts but REITs, which can be both publicly traded as well as correlate with the stock market. If they are private, however, that won't be the case.

 

Their benefits and drawbacks

Keen eyes will observe that the above information concerning the inner workings of alt investments hints at what works and what doesn't. However, more perspective is needed to truly understand them, especially if you want to take the risk and invest your assets.

 

Pros

There is more than a bit of upside to alt investing, hence its popularity. The reasons for this typically boil down to a few things such as:

Widening the portfolio

Chief among these is the portfolio diversification opportunities available. Said diversification delves into not only the investments themselves but the wide range of tactics open for use. 

Lack of a connection to the market

The distance between these areas of interest and the market is also quite advantageous. The lack of correlation means that there is no effect of volatility for the most part. This is why these investments are great hedges, save for real estate, which is subject to the market if it isn't private.

Historical performance

Nothing is certain whenever the financial world is involved and the same goes for alt investing. That said, the relative safety in some areas regarding such ventures has proven to be quite fruitful over the years. The lack of volatility has a lot to do with that and has led to sustainable returns, especially in real estate.

 

Cons

As is normal, there are reasons why people favor stocks and bonds as opposed to alts. These include the following:

Lack of liquidity

The private nature of alts means that if your money is placed in them, they are difficult to turn into cash. As such, stocks beat them out because selling shares is really how it all works.

Regulation issues

Taking crypto as an example, lack of regulations means things aren't particularly clear. This affects the pricing of things which is murky at best.

Management difficulty

Managing alt investments isn't impossible, but it is difficult. This is mainly due to the copious research that goes into risk assessment especially.

 

So if you are planning to invest, for example, $10,000, it could be a daunting task at first, but considering alternative investments such as cryptocurrencies, REITs, and commodities could potentially increase returns this year. Here are investment tips that can help maximize earnings in the area:

- Start with a plan for your strategy: (focus on goals and risk tolerance)

- Invest in what you know and make research

- Diversify your portfolio

- Invest in REITs: real estate investment trusts can provide income and diversification

- Consider commodities: this can provide diversification and act as a hedge against inflation

- Research cryptocurrencies: this can provide high returns, consider the high risks as well

- Look for opportunities in emerging markets

- Be patient as investing is a long-term game and requires patience and discipline

 

Final thoughts

From what you've read above, it's fair to say that alts are a good way to go for any investment venture. The aspect of portfolio diversification is particularly attractive as several streams of income are always welcome. Having said that, the lack of liquidity coupled with standardization issues means that problems will always be faced. In fact, these problems point younger investors especially to more traditional investments because the risk factor is greatly reduced. 

 

That said, the lack of regulations on some of these alts, with crypto being a prime example, can curb some of the trepidation. The limited effects of recessions and/or inflation will also sway minds, so always be aware of that. In any case, seeking professional consultation can be a wise decision to get expert advice and guidance on this specific topic. Request a consultation with our expert team, we can help you build your own custom solutions to gain more profit in the niche!

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