By Chitra Kadam, Financial Engineer, Hedonova
Alternative investment can help investors diversify their portfolios, minimise the impact of instability, as well as achieve long-term financial goals independent of market circumstances.
However, there is an extra degree of complexity and danger associated with these possible advantages. To make better-educated portfolio selections concerning alternatives, investors should be familiar with the various techniques accessible.
What Is the Process of Alternative Investing?
Alternative assets lack a clear focus, thus there is a lot of ambiguity surrounding them. Any investments or assets that cannot be categorised as stocks, bonds, money, income funds, as well as exchange-traded funds are considered non-traditional.
Regardless of the fact since alternative assets have such several benefits, not all investors should consider them. They are often illiquid, making it difficult to sell them or convert them into cash. They frequently have large minimum investments or fee structures, and many of them have less monitoring than stocks and bonds. Alternative investments provide a wide range of unique traits, making them one of the most dynamic asset classes. As more options become available to individual investors, investors and industry experts need to be aware of them.
Diversifying Alternative Investment Opportunities
The alternative investment market is huge. For the typical investor, certain alternatives are well-known, like real estate or precious metals. Others could be a little more specialised, like collecting fine art or making investments in expensive wines. There are many more that fall in between these two extremes and can provide investors with low-correlation investment opportunities while still playing a significant influence in your total portfolio.
A few of the rarest vintages on earth have a thriving market in the world of fine wine, and they come with expensive price tags as well. With returns of 11.6 per cent annually, the fine wine industry has outperformed the S&P 500 over the previous three decades.
Fine wine investors used to have to choose the wines they wished to include in their portfolio primarily on their own. Then they needed to locate a location to keep it. More investors found it difficult to think about fine wine’s potential position in their portfolio because of these two restrictions.
Whisky has gained enormous popularity among bargoers over the years, and investors have started to recognise its potential as just an asset class. You have the choice to invest in a single cask of whiskey, invest in a whisky fund, or buy bottles for resale. But to do this, you need to be knowledgeable because you need to understand which whiskies are of an investment grade.
The worth of a whiskey is typically best determined by its age and exclusivity rather than its taste. Additionally, you need to account for market downturns brought on by shifting customer preferences. Even while whisky may currently be in the limelight, it constantly runs the risk of losing that position.
Peer-to-peer (P2P) Lending
Peer-to-peer (P2P) lending is a relatively new alternative investment, much like Robo-advisors. In essence, you give loans to companies and collect interest every month, much like a bank. P2P lending platforms typically provide cheaper interest rates than traditional financial institutions & accept businesses with poorer credit scores, thus businesses also profit from them.
You must take into account the possibility of a company defaulting on its loan, just as banks. The default rate for platforms now offered in Singapore varies from 0 per cent to 13.6 per cent. P2P lending sites, which were previously stated, allow companies with weaker credit scores, which raises the danger in this situation. The cost structure varies depending on the site, so do your research before investing any money.
You can invest in music royalties even if you have never composed a song in your life. Nowadays, there are several sites for buying and selling music rights, allowing musicians to sell some of the rights to their songs or albums and investors to purchase those rights to get royalties. Several of these platforms allow you to invest not just in song royalties but also in other kinds of music royalties, book publishing royalties, television royalties, and movie royalties.
You create a passive income stream when you invest in music royalties. You receive a modest payment known as a royalty every time the music is played, whether it’s by a supermarket playing it in the aisle or a Spotify user. You can make royalties infrequently or almost every day, depending on the type of music you invest in.
The Conclusion on Diversification Through Alternatives
A well-balanced portfolio, in the eyes of many investors, entails more than just holding equities and bonds. Alternative investments may provide investors additional exposure to holdings which are less reliant on long-term trends in the stock market. This can lessen the chance that assets will lose value during a slow market. Even better, it can open up new doors for your professional development.