First, let’s define alternative investing. Simply put, it refers to investments that fall outside of traditional asset classes like stocks, bonds, and cash. This can include real estate, private equity, hedge funds, commodities, and other types of investments that are not typically found in a typical investment portfolio.
One of the primary benefits of alternative investing is diversification. By adding alternative investments to your portfolio, you can reduce your overall risk and potentially improve your portfolio’s performance. This is because alternative investments tend to have low correlations with traditional asset classes, meaning they can perform differently under various market conditions. For example, a study by BlackRock found that a portfolio with a 10% allocation to alternatives had a 39% lower volatility than a portfolio with a 0% allocation to alternatives (https://www.blackrock.com/us/individual/literature/white-paper/alternative-investments-101-paper.pdf).
Another potential benefit of alternative investing is the potential for higher returns. Many alternative investments have the potential to earn higher returns than traditional assets, as they often involve investments in growth-oriented companies or projects that may not yet be available to the general public. This means that, if you’re willing to take on a higher level of risk, alternative investments can be a good way to potentially boost your returns. A study by Cambridge Associates found that private equity investments had an average annual return of 14.1% over the past 10 years, compared to the S&P 500’s average annual return of 9.8% over the same period (https://www.cambridgeassociates.com/insights/private-equity-returns-1q17/).
Of course, any investment carries some level of risk, and alternative investments are no exception. That’s why it’s important to carefully research and conduct due diligence before investing in any alternative investment. This includes understanding the specific risks associated with the investment, as well as the track record and experience of the investment manager.
One final benefit to consider is the potential for tax advantages. Some alternative investments, such as private equity and real estate, offer the potential for tax-deferred or tax-free returns. For example, investing in a real estate investment trust (REIT) can provide investors with tax-deferred returns on rental income and capital gains.
In conclusion, alternative investing can be a valuable addition to a well-rounded investment portfolio. The potential for diversification, higher returns, and tax advantages make it worth considering for investors who are willing to take on a higher level of risk. However, as with any investment, it’s important to conduct thorough research and due diligence before committing any funds.