Alternative Investments
I think about finances constantly. Not just my own situation, but all things personal finance. Apparently, this behavior is unusual, so I try to be cognizant that not everyone wants to talk about these topics regularly. However, I often have a similar conversation with people when personal finance becomes the topic. They say, “I just need to start.” My typical response is to pay off any credit cards, spend less than you make, and start contributing to a retirement account as your initial investment account. This account should primarily be invested in a combination stocks and bonds and rebalanced over time.
That small piece of advice is enough for you to succeed financially. The rest of this article can be ignored by most people.
I’m joking, of course!
This article explains alternative investment classes. I say that these can be ignored by most investors because not everyone needs them in their portfolio to achieve a successful retirement. It will be very difficult to retire comfortably if you are not investing in the stock market throughout your career. I know that real estate investing can make it happen, but that requires more work and education. You do not, however, need to buy gold and silver to retire.
Can I stress this point again? Do not open a Gold IRA that you see in the commercials.
These investments should complement a core portfolio of stocks and bonds. I will cover a few examples and explain how they can be used to enhance your investments.
Commodities – “Raw materials” is the easiest way to describe these investments. These include things like oil, gold, silver, and coffee. Commodities like gold and silver can be purchased from various companies and stored. Assuming you don’t want to find a place to store barrels of oil, commodities can also be bought and sold using futures contracts. For example, I can purchase a contract to buy oil next month. If the price goes up before the contract expires, I could sell it for more than what I paid because it entitles someone to buy oil at a lower price than what is being offered currently.
Collectibles – The main one in this category is artwork. Artwork is difficult to invest in because you don’t know which artists will succeed and the famous paintings are expensive already. This category isn’t just artwork though. Do you have any antique furniture, comic books, or stamps? Think about all the junk you discover when you clean out your closet and say to yourself “I wonder if this is worth anything.” 99% of the time the answer is no. However, there are things that will appreciate over time and you should be aware of them as possible investments, especially if you are able to buy at a low price. The biggest issue with these investments is that people generally have a hard time selling them.
Real Estate – We are all familiar with this investment. Most people don’t consider their home anything other than a place to live, but they should. Your home is an asset and you should be aware of the value of it. Real Estate investing can also include rental properties or rehabbing properties to sell at a higher price. Real Estate is the only asset class listed here that can provide monthly cash flow in addition to appreciation. These investments can be difficult because it may require more cash than you have available. You can also invest in real estate funds, called Real Estate Investment Trusts, that can be a good starting point for new investors.
Having 5-10% of your portfolio in each of these asset classes can add diversification and improve your overall returns. There are more alternative investments, but these are good examples of how you can diversify your portfolio outside of stocks and bonds. Why does that matter? Diversification allows you to limit your losses and realize gains when certain investments have down years. For instance, gold tends to increase in value when the market is down. This also allows you to buy low and sell high if you rebalance your portfolio over time.
Make sure that your investments align with your overall financial goals. Alternative investments are complicated but can add immense value when used properly.
Mike Zeiter, CPA/PFS
