Yahoo Finance Alternative Assets Could Make You Rich, but You Need To Know About These Downsides
Age-old investment practices are ingrained in our culture, proliferating generations of investment habits. But given that we’re in the midst of the most rapidly changing economy to date, a fresh perspective toward standard investments is in order.
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Enter alternative investments, a supporting cast member of diversified portfolios, but today, a rising star. However, before adding them to their portfolios, wise investors need to understand the pros and cons of these alternatives before deciding if they make the cut.
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New Market Dynamics Present Billions of Earning Opportunities for Many, Barriers for Some
The standard lineup of index funds and standalone stocks have been standbys for individual and institutional investors alike. With the emergence of cryptocurrencies, their deregulated status created a divide in the market. Thus began a roster of winners and losers, but not because their investments were misguided — many investors were boxed out simply because they couldn’t get in.
“Quite simply, hundreds of billions if not trillions of dollars of a potential addressable market had no reasonable way to invest in Bitcoin,” said Nic Puckrin, CEO of education platform Coin Bureau.
However, the emergence of cryptocurrency ETFs has provided retail investors a way to access crypto in a familiar venue. Traditionally conservative institutional investors can now gain exposure to a new alternative without the risks of custodial responsibility. Plus, through an ETF, crypto remains liquid, giving new investors confidence to gain exposure and diversify their portfolios.
Improved access doesn’t eliminate doubt or skepticism about alternative currencies. Individuals need to decide what investments, crypto or not, match their goals. Institutional investors will need to incorporate their philosophies in their investment policy statements, with approval from their boards.
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Low Correlation to Traditional Assets Means Investors Need To Be Diligent
Alternatives are the yin to the yang of traditional assets, offering the opportunity to hedge market swings. Target date funds tell this story well, with greater exposure to alternatives and higher-risk assets further from retirement age.
For those investing outside of a preset mix that adjusts for you, alternatives require attention. Economic conditions and forecasts shift consumer confidence on a dime and can drive values outside the standard deviation.
Private equity and venture capital can offer big returns but typically come with a price tag to match. Hefty capital requirements and the potential for calls mean investors need to be ready to bankroll opportunities. However, investors engaged in alternative forecasts can hedge traditional returns and come out ahead.
Complexity and Headline Noise Distract From Data
Fear of the unknown can shake anyone’s confidence, even a savvy, successful investor. Regulatory differences from traditional investments and asset classes garner skepticism, especially from entities benefiting from maintaining the status quo. Monetary policy, inflation and government oversight shift the investment landscape, commanding the narrative.
A lack of understanding of alternatives isn’t to be ignored; every asset class requires education. Ben Franklin is known for saying, “An investment in knowledge pays the best interest,” and that’s certainly applicable here. When it comes to investing, nothing will pay off more than educating yourself. Do the necessary research and analysis.
That said, without a century of market data to analyze, what’s new can represent risk. However, investors who educate themselves and network with others can build a library of data that can guide future investments. By operating outside the usual arena of investments, alternatives present new opportunities to capture big returns.
Take an Active Role in Understanding Alternatives
The first step toward diversifying your portfolio isn’t to start trading, it’s to learn. No matter how large your bankroll is, misplacing your assets into investments you don’t understand isn’t prudent. You might have a few wins, but without an understanding of the pros and cons of alternatives, you’ll lose out long term. Dedicate the time to learn about alternatives, the opportunities within new currencies and how they fit your goals. When you do, you can diversify your portfolio with the full range of possibilities, no matter the market conditions.
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This article originally appeared on GOBankingRates.com: Alternative Assets Could Make You Rich, but You Need To Know About These Downsides
