Throughout life, we are presented with several investment opportunities. From stocks and bonds to purchasing a home or adding money to your 401K, there are several types of investment opportunities available. However, there also exist some lesser known alternative investment strategies. These alternative investments provide diversity to your portfolio, improve your risk management efforts, and can help you to improve your return on capital investment.
Top Three Alternative Investments
Dividing your investments provides you with the unique opportunity of capitalizing more vigorously, while simultaneously making calculated risks. In this vein, some of the top alternative investment strategies include: commodities, real estate, and mutual funds.
Investing in Commodities
There are several ways to invest in commodities, with the most popular being the use of a futures contract. In a futures contract there is an agreement to buy or sell, in the future, a certain quantity of a commodity at an agreed-upon price. Oil and gas, fine metals, livestock, and grains are just a few of the commodities that can be invested in.
Each type of commodity offers a certain level of investment risk. For example, when you invest in grains you are at the mercy of the weather and the ability to transport your grain from the farm to the grain elevator, and onto its final destination. However, commodities do offer a high-risk investment strategy. The majority of investors are advised that 10 percent of their portfolio should be invested in commodities, such as gold.
Investing in Real Estate
Real Estate is both a tangible and immovable asset. It is a unique investment due to its ability to change as the market deems fit. For example, if you own a piece of property, you can easily build on the land or sell it to other real estate investors. Additionally, your real estate investment can be divided amongst a pool of investors. There are four main types of real estate Investments:
- Free and Clear Equity – In a free and clear equity investment the investor receives all ownership rights, due to the nature of the outright purchase of the real estate asset.
- Leverage Equity – Leverage equity gives an investor the same ownership rights as a free and clear equity, however the investor is subject to debt. If the investor fails to pay the debt or pledge (mortgage) then he will lose ownership status.
- Mortgages – Mortgages are a unique alternative investment strategy. They provide the opportunity for an investor to purchase a real estate asset, however the investor will be in debt to the lender until the asset is paid in-full. Investors can diversify their real estate portfolios through the purchase of multiple types of mortgages.
- Aggregation Vehicles – Aggregation vehicles occur when investors’ funds are pooled together to give them a wider access to the real estate market.
Investing in Mutual Funds
As the name suggests, mutual funds are pools of money from hundreds or even thousands of investors. This money is used to construct a large portfolio of bonds, stocks, real estate, or other securities. The majority of funds will require a minimum investment commitment of a thousand to hundreds of thousands of dollars. With a large investor pool, and a minimum individual investor, you will be able to build a more diversified portfolio cheaper than you could on your own.
Analyzing the average returns, the investment portfolio, as well as the management team will help you to choose the optimal mutual fund for your investment needs.
Choosing alternative investments can help you to diversify your portfolio. These alternative investment strategies can also help you to marginalize risk while improving your accessibility to capital gains throughout the course of your investment period.