Its pretty easy to get started investing.
Once you dig into it, though, a lot of questions come up that complicate the process.
Heres a quick breakdown for the average personal investor.
What is an Alternative Investment?
Lets say youre invested long-term for your retirement.
Either way, youre already doing pretty well for yourself.
As your net worth grows, though, its time to take your portfolio up a notch.
Elliott Weir, Founder & Certified Financial Planner atIII Financialtells us why theyre important.
Alternatives can be useful in a portfolio to provide some balance.
Alternative asset is a broad term that includes assets that are not stocks, bonds, or cash.
Examples would be commodities (like gold), hedge funds, collectibles, and real estate.
Often they are more complex assets that are more difficult to value and harder to turn into cash.
So technically, your old collection of beanie babies counts as an alternative.
Youve got stocks, bonds, and real estate down pat.
After the age of 40, youre looking for a more balanced mix in your net worth.
As a result, you purposefully invest less in stocks and more into bonds and alternative investments.
Your real estate equity also holds steady, market willing.
This is important: alternatives arent meant to replace your entire portfolio.
Theyre meant to enhance it.
Some investors will invest strictly in alternatives, though, likehedge funds.
Buffett said Saturday the index fund is beating the hedge funds by nearly 44 percentage points over 8 years.
It was less than $600 an ounce by 1985.
And since peaking in 2011, gold has lost more than a third of its value.
You should have them in your portfolio, but again: theyre not meant to replace your portfolio.
This is a good starting point, but it doesnt account for alternatives.
And most basic asset allocation calculators only include stocks, bonds, and cash.
Ideally, the closer you are to retirement the less you want to invest in stocks.
That could be a lot of investments, but lets go over a few of the most common.
Youve probably heard the termhedge fund,which is a traditional alternative investment.
In short, they ideally earn a return even when the market plummets, which keeps your portfolio balanced.
Hedge funds arent the only alternative, though.
Well get to more of them later.
They may still require a large minimum investment, but its typically a lot more digestible than several million.
Like regular mutual funds, these are made up of a pool of investments.
In this case, these funds are meant to hedge the market.
This will leave the investment decisions up to a team that understands how that market functions.
Precious Metals
You could also invest in commodities,like gold or silver.
Fidelitysgold fund, for example, is FSAGX.
There are other creative options, too.
You could try peer-to-peer lending using a tool likeLending Club.
As Forbes explains, 2% is a typically fee for those million dollar hedge funds.
If you buy an ETF or mutual fund, though, the fee shouldnt be that high.
Most mutual funds and ETFs have fees of less than 1 percent.
Overall, its about making sure your portfolio is balanced in something other than stocks and bonds.
Illustration by Sam Wooley.
