Investors are constantly on the lookout for strategies that can help them achieve their financial goals while helping to mitigate risk. One approach that has been gaining traction in recent years is alternative investing. This strategy, which includes a diverse range of assets beyond traditional stocks and bonds, offers a host of benefits that can help investors navigate the complexities of the modern financial landscape. In this blog post, we’ll explore the advantages of alternative investing and how it can help investors meet their investment goals.
The Long-Term Focus
One of the key benefits of alternative investing is its long-term focus. Unlike some traditional investments that may be subject to short-term market fluctuations, alternative investments often have a more extended investment horizon. This long-term approach can be advantageous for investors who are looking to hold their investments over a longer period of time and don’t need liquidity with their investments.
While it can be important to note that the performance of alternative investments can vary and past performance is no guarantee of future results , many of them are structured to provide returns over a more extended period. For instance, investments in private equity or real estate often require a longer commitment, but they have the possibility to yield returns over the long haul[1].
Diversification
Diversification is a fundamental principle in investment strategy, and it can play a crucial role in alternative investing. By spreading your investments across various asset classes, you may help mitigate risk in your portfolio. The idea is simple: when one asset class underperforms, another could excel, helping to offset potential losses.
Traditional portfolios often rely heavily on stocks and bonds, which may leave investors vulnerable to market volatility. In contrast, alternative investments offer an opportunity to diversify beyond these conventional assets. This diversification can help mitigate the risks for your investments, helping to smooth out the ups and downs of the market.
Consider a scenario where a portfolio is heavily concentrated in stocks, and a sudden market downturn occurs. In this case, the entire portfolio could suffer. However, if alternative investments such as real estate or commodities are included, they may not react in the same way to market movements, helping to mitigate the impact on the overall portfolio.
Access to Unique Opportunities
Alternative investments open the door to unique and often exclusive opportunities that may not be available through traditional avenues. These opportunities can provide investors with access to assets and strategies that have the potential to help them meet their investment goals.
For instance, investments in private equity allow you to be part of companies that are not publicly traded, offering the potential for growth. Real estate investment trusts (REITs) can offer a way to invest in real estate without the need for property ownership, giving you exposure to the real estate market’s potential upside.
Furthermore, some alternative investments, such as venture capital and startups, can provide a chance to be on the ground floor of innovative companies. These unique opportunities can help add an alternative dimension to your investment portfolio.
Risk Management and Hedging
Risk management can be a critical consideration for any investor, and alternative investments can be a tool for hedging and helping to mitigate risks. While it’s impossible to eliminate risk entirely, diversifying into alternative assets can help you manage and mitigate specific risks associated with traditional investments.
For example, during times of economic uncertainty, traditional assets like stocks and bonds may experience heightened volatility. In such situations, alternative investments like precious metals, commodities, or even inverse exchange-traded funds (ETFs) could act as hedges to help mitigate losses in your portfolio.
Hedging strategies with alternative investments can also be used to mitigate risks associated with currency fluctuations, interest rate changes, or geopolitical events. By strategically incorporating these assets into your portfolio, you may help enhance your portfolio management efforts.
Less Market Volatility
One advantage of alternative investing is its potential to help reduce portfolio volatility. Traditional investments often move in tandem with broader market trends, making them susceptible to market downturns and fluctuations. In contrast, alternative investments may have the potential to behave differently, helping offer stability during turbulent times.
Alternatives rely less on broad market trends and more on the strength of each specific investment; hence, adding alternatives can potentially help to mitigate risk.
During periods of market volatility, assets like real estate and private equity may continue to perform steadily, helping to counterbalance the turbulence in the stock and bond markets.
The following chart from BlackRock shows some of the trends impacting alternatives and some benefits of investing in alternatives:
Final Thoughts
In today’s fast-paced and unpredictable financial landscape, alternative investing stands out as an option that can offer investors benefits. With its long-term focus, diversification potential, access to unique opportunities, help with risk mitigation, and potential for reduced market volatility, alternative investments can be an option to help people meet their financial goals.
As you explore your investment options, you can consider incorporating alternative investments into your strategy. These assets can play a role in helping you achieve your financial goals while helping to mitigate risk. Remember, the world of finance is continually evolving, and being open to alternative investments could help unlock new opportunities.
Are you looking to invest in alternatives? Sign up for a MicroVentures account to start investing!
Want to learn more about investing in alternatives? Check out the following MicroVentures blogs to learn more:
- Understanding Pre-Money and Post-Money Valuations
- Navigating Early-Stage Investing: Mitigating Risks
- Regulation Crowdfunding: Empowering the Next Generation of Investors
- Navigating Risk and Reward in Venture Capital Investments
[1] https://www.blackrock.com/us/individual/insights/alternatives-yields-2023#:~:text=One%20aspect%20that%20may%20be,yields%20to%20generate%20higher%20returns.
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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.
