What’s an Alternative Investment?
When you think about investing, stocks and bonds may be the first things that come to mind. But they’re far from the only possibilities.
Alternative investments, often called “alts,” include assets and investment strategies that fall outside traditional offerings. They can provide additional ways to diversify a portfolio, but they may also come with added costs and risk.
Alts Come in Many Forms
Alternative investments cover a broad range of assets. Private equity, for example, can involve investing in companies that aren’t publicly traded. Private credit generally involves privately negotiated loans or debt financing, typically provided by nonbank lenders.
Other alts may include real estate, hedge funds, infrastructure, venture capital and commodities such as gold. Because the category is so broad, alternative investments can have very different goals and levels of risk from one to the next.
A Different Kind of Diversification
One potential appeal of alternative investments is portfolio diversification. Some alts may respond differently to economic conditions and market movements than traditional stocks and bonds. Adding investments that don’t always move in the same direction could potentially help spread risk across an investment portfolio.
Certain alts provide access to investment opportunities that aren’t available through public markets, such as privately held companies or specialized real estate projects. But diversification doesn’t eliminate the possibility of losses, and alts aren’t automatically safer simply because they help diversify a portfolio.
Knowledge Is Key
Alternative investments can carry risks that may be less familiar to everyday investors. Depending on the investment, these can include higher fees, greater complexity and less publicly available information to base investing decisions on.
Valuing some alternative assets, for example, can also be challenging when they aren’t regularly bought and sold on public markets. And while an alternative investment may offer the potential for attractive returns, you can also lose money.
Before investing, make sure you understand how the alternative investment works, what it costs and how it fits into your overall financial strategy.
Thinking Through Timelines
Liquidity is another important consideration. Publicly traded stocks and many traditional funds can generally be sold relatively easily. Some alternative investments can’t.
For example, private equity investments may need to be held for several years, and investors may face restrictions on when they can withdraw their money. That could make an alternative investment a poor fit for money you expect to need soon. Understanding when and how you can access your money should be part of evaluating any alternative investment.
Retirement Ready?
Alternative investments have traditionally been less common in 401(k) plans, but that could change. Federal policymakers have recently taken steps aimed at expanding access to alternative assets in workplace retirement plans. If alts become available through your retirement plan — or you’re considering them elsewhere — take time to understand any potential benefits, risks, fees and restrictions.
A Financial Professional can help you evaluate how an alternative investment might fit with your goals, time horizon and overall portfolio.
Source
https://www.fidelity.com/learning-center/trading-investing/what-are-alternative-investments