Important Benefits and Risks of Alternative Investments

Alternative investment professionals

Diversification. Diversification allows you to distribute your risk between different industries, sectors and regions. When the technology sector is on the rise and the oil industry is in decline and you are invested in both, you can compensate for the ups and downs of both. Alternative investments offer diversification of investments, in particular because they may have a lower correlation with traditional investments.

Potential Reward. This is obviously one of the most attractive aspects of alternative investments: they have the potential to generate big financial gains. But to make these big profits, you need to choose the right investment at the right time. And people, even investment professionals, often make mistakes and lose money.

Access. Until recently, alternative investments were only available to accredited investors or those with a high net worth. There are now more opportunities than ever for everyday investors to access some of these investments.

Disadvantages of alternative investments

High Risk. Alternative investments almost always carry a higher risk than traditional investments such as stocks or bonds.

Illiquid. Many types of alternative investments may not allow you to withdraw your money immediately.

Less Regulation. Many alternative investments are less regulated by the SEC than traditional investments.

Storage. Some alternative investments, such as precious metals, crypto and collectibles, have the added difficulty of storing them.

The best Alternative to stocks

The best alternative investment for you depends on your existing portfolio. For most people, a well-diversified stock-based portfolio can help them build wealth over time. If your portfolio is already in good condition and you are looking for something more exciting to complete with a small percentage, you can look at the historical returns of alternative investments compared to the standard market.

For example, the average return on the stock market, as measured by the S&P 500 index, has been about 10% per year for the last 30 years. Some years are higher and others are lower, but over time, the S&P 500 index funds have generated a return of about 10%, without taking into account inflation.

Knowing this, you can start comparing this to the performance of alternative investments. Since 1972, the FTSE NAREIT All Equity REITs index has generated an average total annual return of 11.3%. This is not to say that REITs always outperform the S&P 500, but it has a strong fifty-year performance. If you were to add a REIT to your investment portfolio, it would also help diversify your holdings.

ince 1969, gold ha had a median average closing price of about $384 per ounce, and in 2024, the average closing price of gold exceeded the $2,000 per ounce mark. It sounds great, but the average annual return on gold over the past 30 years has been 6.7% — significantly lower than that of the S&P 500 or REITs. However, gold can serve as a hedge against inflation. There are advantages and disadvantages to every investment. That is why it is so important to consider possible alternative investments in relation to your existing portfolio.

Final result

Alternative investments can be exciting and help diversify your portfolio, but they also come with special challenges and risks. If you are curious about alternative investments, it is worth doing your homework to see how they could complement your existing investment portfolio. If you don’t yet have an investment portfolio made up of more traditional assets, it may be better to focus on building it first.