If you want to think like an investor, your first step is to get comfortable with risk. Your second step is to look for ways to reduce it.
Do some research on managing risk in your investment portfolio and you will quickly find yourself reading about diversification. Investors use diversification to reduce the chances of any one event — such as a war in Asia, a global pandemic, or rumors of a major tech breakthrough — negatively impacting their portfolio.
In its simplest form, diversification involves building a portfolio that includes a diverse group of traditional investments. Rather than buying all tech stocks, energy stocks, or finance stocks, an investor looking to diversify will have a mix of all three, as well as others like industrial stocks, utility stocks, healthcare stocks, and more. By spreading investments over a range of industries, investors lower the odds that any one event will negatively affect their entire portfolio.
Another diversification strategy involves moving outside of the traditional investment world of stocks, bonds, and cash and entering the world of alternative investments. Investments that are considered “alternative” bring a different type of diversification to portfolios. In general, the fluctuations in value of alternative assets do not track with those of the stock market. As a result, investors can keep a portfolio balanced when events affect the market as a whole.
Before diving into alternative investments, there are a few factors that should be considered. For example, they often offer lower liquidity. Exiting an alternative asset is not usually as easy as selling a stock. There is also typically less regulation in the world of alternative assets, which means less transparency and investor protection. With alternative investments that are relatively new, such as cryptocurrency, predicting future performance is challenging due to the lack of historical data.
If those factors don’t intimidate you, here are a few alternative assets that provide opportunities for high returns.
Gold
Gold has long been a staple in diversification due to its history of increasing in value as stocks decrease. In fact, some experts see it as a safety net for stock market investing. As with real estate, investing in gold can involve the purchase of actual gold bars, coins, jewelry, as well as exchange traded funds or mutual funds that invest in the gold industry.
Collectibles
If you think that collectibles such as fine art, rare wines, and celebrity memorabilia do not qualify as an investment, then you have not been paying attention to recent headlines. In 2021, the art market logged its best year ever with a record $16.5 billion in sales. The surge happened during a period of climbing inflation, which typically has a negative impact on traditional investments.
The dramatic increase in value in sports trading cards during the Covid pandemic is another example of the potential that collectibles offer for diversification. Both vintage and modern cards skyrocketed well into the million-dollar range during the last two years, with a 2017 Patrick Mahomes card selling for $4.3 million and a 1952 Mickey Mantle selling for $12.6 million.
Cryptocurrency
Bitcoin and other top cryptocurrencies are alternative investments that definitely have the potential for high yields. They also, however, have the potential for staggering losses. Because crypto at this point is primarily a speculative asset, the crypto market is marked by volatility. While including a small amount in your portfolio can help to diversify, including a large amount will not do anything for your risk management efforts.
Additionally, it’s important to keep in mind that crypto is not a regulated asset, meaning you will need to be extra careful to avoid scams. Crypto regulations, which seem imminent, could reduce the volatility in crypto markets and affect their status as an alternative asset.
These investment options, and many others that are included in the alternative category, can be used to your advantage to develop a sound investment strategy. The key, however, will always be having a strategy that you believe in. Focusing on your investment roadmap, rather than reacting to the ever-changing landscape around you, will help you to stay committed and achieve your goals. Being proactive, rather than reactive, will always bring better returns.
— Jerremy Alexander Newsome is considered one of the leading global minds on stock market education. He serves as the CEO of Real Life Trading, an organization that works to help people find financial freedom by mentoring them in all aspects of traversing the stock market. Newsome has been learning about the stock market since the age of six. Now, he’s giving back by helping others to become successful traders.