Most people have a general understanding of what investments are and should have a diverse portfolio so that their money can make more money over time. Most retirement plans involve investing in traditional stocks, bonds and cash. Still, more individuals are looking into alternatives such as private equity, hedge funds and commodities to diversify their portfolios further. Before investing your hard-earned money into something labeled “alternative,” you will want to research the three primary criteria for investments to be considered alternatives: their complex nature, high degree of risk and lack of regulation.
Complex Nature
As wealth management professionals like Frederick Baerenz will tell you, the complex nature of alternative investments can make them more appealing because they exist outside traditional financing structures and are often tangible items like art. This complexity of nature can have some downsides, however, such as the difficulty in liquidating these investments and determining whether an investment has current or potential value.
High Degree of Risk
One aspect of the complexity involved in alternative investments is that it can be challenging to determine the risk level for any given asset. Experts like Fred Baerenz know that the higher the risk involved, the higher payout you can see when liquidating your investments, but the easier it can be to lose money when a market bubble pops. Some common examples of this include cryptocurrencies, art and collectibles.
Lack of Regulation
The U.S. Securities and Exchange Commission, or SEC, oversees traditional investments and may or may not oversee some alternative ones. While these investments will fall under the purview of the SEC, most are not required to register with them and are not regulated or overseen by them. This can make the market ripe for scams and fraud. The lack of regulation can also make legitimate investments in new or emerging sectors seem fraudulent when they are not.
Alternative investments can benefit and diversify your portfolio, especially when financial markets seem unsteady. Before investing, you should research to find the risk level, understand the complex nature and know the regulations surrounding the alternatives you are interested in.
