In times of market volatility, alternative investments provide new ways to diversify portfolios with stable investments. But, investors do not fully comprehend all aspects of alternative investments. Understanding how alternative investments function is critical if investors are to make better-educated judgments about the role of alternative investments in their portfolios. With that in mind, we address five popular alternative investments myths.
But firstly, what are Alternative Investments?
Alternative investments aren’t complicated. Nevertheless, alternative investments cover so many various sorts of investment options that many people are perplexed. Alternative investments are any sort of investment that differs from traditional investing strategies such as cash, bonds, and stocks. Real estate, commodities, and asset-based investments are also alternative investments examples.
For many investors pursuing FIRE (financial independence, retire early), the equity market has been the destination to be. And yet, there are other ways for creating passive income streams beyond the market. Alternative investments such as real estate are an attractive method to accelerate your FIRE journey. Alternative investments add value to almost any investing portfolio.
But, how exactly do alternative investments benefit you? It is mostly a passive income investment. Passive income may be generated through alternative investments assets like real estate.
For instance, most occupied investors appreciate their time highly, and actively maintaining an asset or portfolio demands a significant amount of effort. Let us use real estate as an example because that is where most investors believe they should begin actively investing.
After becoming enthralled by the notion of renting out a single-family house or even a modest multifamily apartment, they rapidly discover how much effort is necessary and how steep the learning curve is. There are an infinite number of educators marketing their 6-Step Plan to Success, but it is eventually hard labor – recruiting co-investors, acquiring money, arranging the deal, discovering and analyzing properties, and so on.
But through alternative investments strategies like fractional ownership of commercial real estate investing, you do not have to actively deal with all these headaches anymore. How so? Because platforms like Assetmonk take care of everything from A-Z, from curating investment opportunities from growing markets to asset management and exit support. All you have to do is provide the funds needed. Yet, you can still generate passive income despite zero work.
5 Alternative Investments Myths Busted
There are various myths about alternative investments, and we’ve all fallen victim to them at some point. Investors either have incorrect assumptions about the nature and purpose of alternative investments in portfolios, or they believe alternative investments are exclusively available to super duper rich people. Investors are cautious to incorporate them into their portfolios because of these and other incorrect beliefs.
Let us clarify the most common myths about alternative investments and throw some light on why they should be a part of practically any investor’s portfolio.
1st myth: Only ultra-high-net-worth individuals and institutions have access to alternatives.
Fact: The days of only the ultra-rich being able to afford to pay exorbitant fees and meet the minimum investment criteria required to participate in alternative investments are long gone. Retail investors now have several alternatives accessible to them across a wide variety of risk levels. All of this is possible because of innovation in product structure and the progress of companies like Assetmonk. With a minimum investment of Rs. 25 lacs, investors may invest in luxury real estate assets in key Indian cities and access investing options such as fractional ownership and real estate crowdfunding.
2nd myth: Alternative investments increase investment risk in your portfolio.
Fact: The truth is that it depends. Because of its lower liquidity factor and greater targeted returns, an alternative investment strategy as a standalone solution frequently carries a higher risk character than more standard holdings. When evaluated as part of a broader portfolio, the investment risks may appear mild; alternative investments are frequently impacted by different market conditions than traditional assets like stocks and bonds, and may not necessarily follow the same performance path. Moreover, several alternative investment strategies, like market-neutral, aim to reduce total portfolio risk. Alternative investments are an appealing source of diversity and return potential, as well as a possible cushion against volatility, because of these properties.
3rd myth: Alternative Investments’ illiquidity is detrimental to investors.
Fact: The illiquidity of many alternative investment assets might actually benefit your portfolio. Alternative investment strategies that are not daily-liquidity vehicles, for example, are less likely to be compelled to sell assets fast — and at a loss – than typical mutual funds, which may need to generate capital to satisfy daily redemptions. Furthermore, even if investors cannot withdraw cash on a regular basis, increased illiquidity may enable investment in potentially better-yielding or more sophisticated assets.
4th Myth: Alternative investments are synonymous with private equity funds and hedge funds.
Fact: Alternative investments are diverse and broad. Private credit strategies and some real estate strategies, for example, which are often supplied through a fund akin to private equity, have experienced tremendous development since the financial crisis of 2008, when regular lenders such as banks began to adjust their lending methods. Alternative credit and private strategies like this can provide investors with the opportunity to achieve good long-term returns while being compensated for increased illiquidity and complexity risks.
5th Myth: Alternative investments aren’t required in your portfolio.
Fact: In order to accomplish their financial goals with more assurance, investors must explore outside conventional asset classes for additional sources of returns, particularly during times of uncertainty. By incorporating alternative investments, investors could be able to improve portfolio performance, increase diversity, and lower overall risk. Moreover, alternative investments can assist investors in achieving their objectives by providing new possibilities and broadening the investable universe.
Alternative investments are fraught with a ton of myths. Some investors still consider them high-risk, or exotic funds for wealthy people. Nevertheless, in truth, alternatives have a home in almost every portfolio.
Almost every investor’s portfolio includes alternative investments. Yet, you must choose the best one for your investing goals, current portfolio composition, budget, and risk tolerance.
If you cannot do it on your own, it is recommended that you hire a specialist in the industry to handle your assets.