07. Alternative investments: all you need to know

Admittedly, the word “alternative” adds an interesting twist to just about anything. Think of alternative realities, which have given rise to fiction classics, such as Alice in Wonderland. Or in music, with the rise of mythical bands like R.E.M. or Nirvana. Although sometimes the nuance is rather disturbing, as is the case with alternative medicine… What about alternative investments?

When we talk about investment, the traditional assets are stocks, bonds and cash. People tend to invest in the first two through funds. And in the second, through bank deposits. So everything else is alternative investments. From cryptocurrencies to bricks and mortar to artwork and expensive wines, these are all alternative investments.

And you might ask: what’s the point of investing in precious metals, art or hedge funds? For returns, of course. But more to the point, alternative investments offer a somewhat more sophisticated form of diversification. For a start, because they often involve exclusive investment opportunities: not everyone can invest in Picassos. And also because they have a low correlation with the markets.

Advantages of alternative investments

As we know, diversification helps to reduce risk and also to increase the profitability of the investment portfolio. Low correlation with the markets is another main advantage of alternative investments. But there is more:

• Higher potential returns: alternative investments often have higher potential returns compared to conventional investments. They are more complex and have more risk, so returns can be higher.
• Lower volatility: Because they are generally not subject to market fluctuations and have a longer investment time horizon, alternative investments are often more stable, for example, than stocks. Although some, such as cryptocurrencies, have experienced large variations in value.
• Access to exclusive assets: Unfortunately, few of us have access to works of art or luxury yachts. Such exclusive assets can have significant value and thus provide a unique investment opportunity.

Disadvantages of alternative investments

Advantages and disadvantages are often flip sides of the same coin. For example, the higher potential return has to be weighed against higher risk and more complexity. Uniqueness has the small problem of cost: many alternative investments require much more money than most people could devote to them. There are other disadvantages:

• Lack of regulation: some alternative investments are unregulated and may be subject to greater risk of fraud or manipulation. In some cases, such as the Bernie Madoff or Theranos scandal, with serious damage to participants…
• Less liquidity: It is all very well to have a Romanée-Conti in the cellar: some bottles from this producer have been auctioned for half a million dollars. But it’s not easy – or quick – to turn them into cash… or to find buyers.

Fortunately, there are somewhat more affordable alternative investments. For example, you can invest in commodities or precious metals through mutual funds. With a clear understanding of the risk, it is possible to invest in cryptocurrencies without allocating large amounts. And real estate crowdfunding allows anyone to invest in real estate with little money. In Urbanitae, from only 500 euros. And with a very attractive combination of risk and profitability. And you? Have you already tried it?