Alternative Investments

The Problem with Alternative Investments

Alternative investments are now all the rage.  What investor would snob something that brings them higher returns than just traditional investments?  Alternative investments also protect investors from less than favorable market conditions, inflation and even financial crisis.

However, things might not be as pink as people have painted it.  Find out more about alternative investments here.

What is an alternative investment?

As an investor, you are familiar with stocks, cash, real estate, bonds and other traditional investments.  An alternative investment is anything that goes beyond these traditional investment vehicles and could include a lot of things such as hedge funds, private equity, carbon credits, film and music production, financial derivatives, timber, energy and others.

Alternative investments are often marketed to investors as high yield.

John Greenwood, writing for the The Telegraph UK, reported that some of the biggest returns are coming from collectibles, even though the market is in a downturn.  Greenwood wrote his article in 2008, at a time when the world’s biggest banks had a lot of financial worries.

For example, rare stamps are commanding an average return of 10% for a single year.  The rarest stamps in the GB Rarities Index have seen an increase in value, no matter what the market conditions are.

The shrinking economy also had no effect on fine wine.  There had been a year-on-year increase of around 9.1% in the top 100 wines listed in the index of the London International Vintner’s Exchange.

The overall picture is that even during the time that investment banks, alternative investments were relatively unaffected and continued to gain.

In fact, Clem Chambers at Forbes.com recommends five alternative investments that will help you fight inflation:

1. Gold
2. Numismatic coins
3. Stamps
4. Wine
5. Watches

Chambers writes that these investments are great to win against inflation and ultimately postulates that alternative investments are safe even in a downturn.

The Wall Street Journal sounds the alarm.

If alternative investments are so profitable, why then are people not scrambling to put their money there instead of stocks, bonds and other investments that they are used to.

The thing with alternative investments is that it is very risky.  One wrong turn and you could lose all your money.  Most investors, however, are not all that aware of the risks.

This is what the Wall Street Journal had to say about the whole situation.  James Sterngold wrote that alternative investments can be very complex and it is very possible that buyers are not fully comprehending the risks and the costs behind these investments.

Investment bankers are now taking a lot of risk by shorting or betting against a stock, using leverage to increase the size of a bet or simply buying unconventional assets.  For instance, investment banks have put more than $59 billion in just the first seven months of 2013 into alternative mutual funds.

But we all know that the regular investor does not call up his bankers to say that they want the money to be invested in high risk vehicles, such as a heavily indebted company and other very risky investments.  Instead, investors are told is that they are getting more money from these investments, and brokers are making it appear more attractive than it actually is.

Investors often understand that they need to take bigger risks to get bigger returns. With alternative investments, however, they are not told just how big the risk is and how it is not worth the returns they are getting, even if it is more sizable than conventional investment avenues.  If people knew just where their money is being invested in, they might have good sense to withdraw their money from their investment banks.

Even the more mainstream hedge funds offer an illusion of safety.  A lot of people think that hedge funds protect the investors and outperform stocks especially during an economic downturn.  But this is not true.

Sterngold revealed that, at the start of this decade, hedge funds only gave investors less than 15% in returns on the average, a far cry from the 55% return that investors of a S&P 500 company got from their stocks.  In short, hedge funds are typically under-performing compared to traditional investments, offering lower returns than what you would expect.

You really do not have to.

The good news is that you really do not need to get into alternative investments and shoulder the risks that can hang over your head.

While alternative investments can be a good idea to diversify your portfolio in the short run, there are other options.  For one, you could easily get ETFs for the purpose of diversifying your portfolio.  An ETF could get you invested in properties, gold and just about anything.  Plus ETFs charges lower than alternative investments.

This is not to say that alternative investments are all bad.  On the contrary, what the Wall Street Journal is railing against is the fact that most people might not even realize how risky these are.  In itself, the investment might be riskier, but remember that all investments come with a risk.

You can certainly opt to get into an alternative investment if you are fully aware of the risks.  How do you do that?

Work with a great wealth management firm.

With all the smokescreens and things that you simply do not know when it comes to private wealth management, it really helps to work with experienced investment firms.  Practicality, market knowledge, and experience can help ensure that your money is invested safely yet can still give you great returns.

Go with a firm that can give you professional, insightful and objective advice, so that you could make informed decisions and be able to accurately weigh the risk.

Further, go with a company that understands what you need.  It is easy to see clients as just another source of income and treat them as a corporate entity or a big investor.  However, most investors are individuals or small businesses.  They are investing money that they probably will have a hard time earning back if it is lost.Get a company that understands this fact and proceeds with appropriate caution, coupled with having the experience and knowledge of knowing which investments are probable winners and have a transparent way of doing business, and you can be sure that your investments are safe.