Pros and Cons of Alternative Investments
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PROS |
CONS |
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May offer diversification benefits |
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Are often associated with higher fees and transaction costs |
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Often have higher return potential than |
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Often have higher risk than traditional investments |
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May offer protection against inflation |
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Often lack regulation or transparency |
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May allow investors to more specifically select investment preferences |
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May be more volatile than traditional investments |
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characteristics of what they are. For example, the price of gold is arguably more stable because it’s
used in a variety of industries.
Art and Collectibles
Some investments may double as a hobby, with art, sports memorabilia, entertainment memorabilia, or other collectibles acting as alternative investments. These items may have historical worth or develop worth over time as related parties (i.e., the artist, associated movie star, or associated athlete) become more historic.
Cryptocurrencies
Cryptocurrencies such as Bitcoin, Tether, and Ethereum surged in popularity over the past few years, but they are still considered alternative assets and are largely unregulated in the U.S. Though some claim cryptocurrency does not offer a strong hedge against other risk-on investments, it may provide capital appreciation or passive income due to staking rewards.
Venture Capital/Private Equity
Blurring the lines of an alternative investment, venture capital or private equity is simply a refined branch of stock investments. Instead of trading shares of public companies in an open market, investors may seek alternative avenues to put capital
into private companies or startups.
REGULATIONS
Even when they don’t involve unique items such as coins or art, alternative investments are vulnerable to investment scams and fraud due to the lack of regulations.
Alternative investments are often subject to a less-clear legal structure than are conventional investments. They do fall under the purview of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and their practices are subject to examination by the SEC.
However, they usually don’t have to register with the SEC. As such, they are not overseen or regulated by the SEC the way mutual funds and ETEs are. So it is essential that investors conduct extensive due diligence when they are considering investing
in alternative assets.
HOW TO INVEST
Getting started with investing in alternative investments can vary greatly based on the alternative you’re working with. Some may require substantial capital and research; others may simply require a few clicks of a mouse button. Here are some examples.
Commodities
Commodities involve buying physical assets suel as gold, silver, oil, or agricultural products. Investor can also participate in commodity investment through commodity trading platforms, exchange traded funds (ETFs), or mutual funds.
Art and Collectibles
Investors can invest in art and collectibles through