Diversifying your portfolio is a great way to manage risk. Adding alternative investments to your portfolio could generate a better return too, but the main benefit is to reduce risk. Whether you are looking to diversify your existing investments or want to get started with something new, here we will look at some alternative investment options that you should consider.
What Is An Alternative Investment?
Traditional investments, like venture capital, stocks and bonds, cash or property follow a certain set of rules. Alternative investments follow a different set of rules. Typically an alternative investment will be more unique, have limited accessibility and offer the potential for higher returns. Although the returns can be large it is worth remembering that they come with higher risks.
Investing in real estate, whether commercial, residential or industrial, is probably one of the most well-known alternative investment options. There are lots of different properties to invest in depending on what you are looking for and property provides a relatively low-risk option with steady returns.
Hedge funds are professionally managed investment funds which use various strategies to generate returns and are also one of the better-known investment alternatives. Hedgefunds tend to have more flexibility in the investment strategies and techniques they use. Although they tend to invest in markets like commodities and currencies sometimes more speculative investments can be made which involve higher risks than traditional investments.
EIS Investment Funds
A great alternative investment option is an Enterprise Investment Scheme (EIS). EIS are investment programmes, developed by the UK government, which encourage investment in small and medium-sized businesses. These start-up companies have to qualify for the scheme before investment can be made. In return for investing in these new companies in their early stages, the investors are offered tax incentives.
Investment in EIS provides other benefits too; portfolio diversification, and also has potential for growth and returns. The objective of EIS is to support the development and growth of early-stage companies. The capital is raised from investors who are willing to take on higher risks in exchange for potential tax benefits and returns. To find out more about how to get involved with an EIS take a look at Oxford Capital and their Growth EIS product.
Investing in commodities means investing in physical goods. These commodities can be things like natural resources, agricultural products, energy resources or metals. When you invest in commodities you gain ownership over the resource you are investing in. However, the structure of ownership depends on the investment method chosen.
It is important to understand the investment method and related risks before investing. Commodity investments can be an excellent way to diversify your portfolio as there is always a need for physical goods. Some examples of the most common investable commodities are:
- Precious metals like gold, silver, platinum or palladium
- Base metals like aluminium, zinc, copper or lead
- Industrial metals like iron ore, steel or aluminium
- Energy resources like crude oil, natural gas or heating oil
- Natural resources like water, crude oil or timber
- Agricultural products like wheat, coffee, sugar or livestock
- Soft commodities like lumber, rubber or cotton
You could consider cryptocurrency as an alternative investment. Cryptocurrency is a type of virtual or digital currency operating independently of a central authority (such as a financial institution or government). It uses cryptography for security and is based on blockchain technology. Blockchain is a type of distributed database or ledger which records transactions across a computer network.
Bitcoin (BTC) was introduced in 2009 and is the most well-known cryptocurrency. Since its introduction, many different cryptocurrencies have been created each with their own features and technology. It is advisable to understand some basic cryptocurrency information and fully consider the risks before investing.
Another alternative investment to consider is collectables. These could be items like rare coins, antiques, artwork, vintage cars, stamps and more. Investing in collectables can be a good way to diversify your portfolio and some collectables have shown appreciation in value over time.
However, the value of collectables is heavily influenced by market demand. Consumer trends and preferences can significantly impact the value of specific collectable items. Collectables tend to be risky investments due to the volatility and unpredictability of the market. However, many collectors simply enjoy appreciating and owning their chosen collectables.
As you can see there is a wide range of alternative investments to explore that you could consider adding to your portfolio. Alternative investments can come with their own set of challenges and risks but there are plenty of options to discover.
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