Alternative investments are different from traditional investments such as stocks. Adding it to the investment portfolio improve diversification and lower the risks since different types of investments react differently to the market conditions.
However many investors are not familiar with it and buy into the myths. Let us explore some of the myths so that you know what they really are:
Myth #1: If you buy enough stocks, bonds and mutual funds, you’re sure to have a diversified portfolio
You need investments that perform different functions in your portfolio. Alternative investments may respond differently to market conditions than stocks or bonds, which may help improve portfolio diversification. With diversification, in any market conditions, while some funds underperform, other will perform well.
Myth #2: Alternatives are too risky for ordinary investors
Any kind of investment involve risk. The more you know about it, the better your success. There are many types of alternative funds – some are more risky in return for higher returns, and some are less risky for modest returns.
Look out for investments that offers good security. e.g investments with land title deed as collateral.
Learn as much as you can, do your research and pick the right one for you.
Myth #3: Alternative investments are only for the wealthy
It is true in the past when hedge funds were available only to investors of high net worth and to institution. However, the time have changed. Now, individual investors can invest through mutual funds with minimal investments, lower expenses and daily liquidity.
Myth #4: This isn’t a good time to make strategy changes
Stocks and bonds are no less risky. Stocks are based on future expectations which are uncertain. Bond price falls when interest rates go up. It is better to diversify to asset-backed investments with low corelation to minimise the risk.
Myth #5: Investors do not have access to their capital if they invest in alternatives.
Although many alternatives are less liquid than tradtional investments, the level of liquidity is specific to each investment type. Some are as short as 30 days and as long as 15 years. A long term investor has to weigh its potential returns and the portion that he is comfortable with.
Myth #6: stock markets will always out perform alternative investments.
Most people think that stock markets offer a higher return. Alternatives investments generally have low co-relation with the state of economy, it fare better during recession.
It is prudent to have a mix of alternative and traditional investments in one’s portfolio.
Debunk the 6 Myths of Alternative investing
The next time when you hear any of these 6 myths from your friends again, debunk them:
- If You Buy Enough Stocks, Bonds And Mutual Funds, You’re Sure To Have A Diversified Portfolio
- Alternatives Are Too Risky For Ordinary Investors
- Alternative Investments Are Only For The Wealthy
- This isn’t A Good Time To Make Strategy Changes
- Investors Do Not Have Access To Their Capital If They Invest In Alternatives.
- Stock Markets Will Always Out Perform Alternative Investments.
Now that we have clear the myths, do learn as much as you can about alternative investment to help you make a better decision.