Best 5 alternative investments to diversify your portfolio
Not all financial instruments are traded on a public exchange. You can also buy privately owned assets, which are a form of alternative investments. Explore alternative investments that can be used to diversify your portfolio.
What is an alternative investment?
An alternative investment is a private asset that differs from traditional markets such as stocks and bonds, often traded on an exchange. These private assets include venture capital, private equity, derivative contracts, real estate, hedge funds and futures.
The positives of alternative investments include the ability to hedge them against inflation as well as their low transaction costs compared to listed ones. However, with alternative investments’ opaque legal structure, this asset class is likely to be subjected to scams. All the more reason why it’s important to ensure you use a regulated broker when investing in this asset class.
With us, you’ll be investing with an award-winning platform1 that’s regulated by the Australian Securities & Investments Commission (ASIC). IG is part of IG Group Holdings Plc, who is listed on the London Stock Exchange’s FTSE 250 index.
Pros and cons of alternative investments
There are several advantages and disadvantages to alternative investments. Some of the advantages of alternative investments include increased portfolio diversification. They also carry relatively low transaction costs compared to traditional investment vehicles.
Alternative investments also have potentially high returns due to their low correlation to the performance of traditional asset classes.2
This asset class can be used to hedge against inflation. Leveraged products like CFDs are often used to hedge against existing positions to minimise loss. Note that while hedging can mitigate your losses when the markets move against you, it’ll decrease your gains when they’re in your favour.
Since CFDs are leverage products, they give you increased exposure to the underlying asset at the fraction of cost. However, any losses you make will be based on the full position size and could exceed your initial deposit – it’s important to use our risk management tools to mitigate this.
The disadvantages of some alternative investments include their illiquidity, meaning they can’t be easily valued or sold for cash. Their legal structure is also somewhat unclear, which may leave investors vulnerable to scams.
While alternative investments can yield potentially high returns, these often carry a high risk for investors. To ensure that this is the type of investment for you, it’s imperative that you do your due diligence first, so you’re clear on the risks involved.
|Potentially high returns||Asset valuation is challenging|
|Diversified portfolio||High risk|
|Low transaction costs||Less regulated|
Lateral thinking: how to invest alternatively
Below we provide a list of top five alternative investments that you can use to diversify your portfolio and how to invest in them.
Commodities are goods or materials that occur in nature and are then collected and processed for various human activities. We offer a wide range of alternative commodities, which are within the hard and soft categories.
With us, you can trade and invest in hard commodities that are extracted from the ground that include Gold, oil, copper and natural gas. Some of the soft commodities include harvested crops like coffee, wheat and LB or livestock such as cattle and hogs.
With us you can trade on 27 major commodities at their current market price, with no-fixed expiries. You can use derivatives such as CFDs to trade your chosen commodity at our spot or future price. You can also choose to invest in commodity companies and own the shares outright.
But first, you’ll need to create a commodity trading account. This can be done by completing an online form to open a CFD trading or share trading account.
If you’d prefer to hone your trading skills before opening a live account, you can open a demo account where you’ll be given virtual funds worth $10,000 to practise with.
With us you can invest in forex through currency exchange-traded funds (ETFs). These are managed funds with a basket of currencies that you can invest in to get exposure to changing exchange rates. Currency ETFs can diversify your portfolio from traditional investments and can be used to hedge against macroeconomic conditions.
If you prefer to trade forex above investing in it, you can use our leveraged CFDs derivative product. We offer over 80 currency pairs – from majors like GBP/USD, to exotics such as HUF/EUR.
While leveraged products like CFDs increases your exposure to the underlying asset at a fraction of cost, they will amplify your losses more than your initial deposit. Remember to manage your risk carefully.
Note that there’s a difference between investing in currency pairs using forex and trading. When buying currency ETFs, you’ll proceed as you would when purchasing company stocks on an exchange. You’ll own units in the ETF, not the currency itself.
However, when trading forex, you’ll be speculating on the upward and downward price movements of currency pairs and you won’t own them outright. The forex market is volatile, manage your risk carefully.
Many people prefer to invest in the housing market as real estate tends to appreciate over time, provided there’s a positive outlook for the industry. If you want to gain exposure in the housing market, then investing in real estate investment trusts (REITs) shares may be an alternative investment option to consider.
REITs are publicly traded companies, meaning you can either buy and own REIT shares outright or invest in a REIT ETF. With us, you can speculate on the housing market by investing in REITs, which are companies that buy income-generating real estate like industrial buildings, hotels, residential property, hospitals and student housing.
Often celebrities or high net worth individuals invest in collectable items deemed to be of higher value than their original sale price. Collectibles often can’t be classified into other investment categories, except for alternative investments. These alternative assets include art collections, fine wines, vintage cars, coins and collectable cards.
Like most alternative investments, the valuation of collectibles can be difficult. However, collectibles kept in mint condition, are likely to receive a higher valuation than those that aren’t perfectly preserved as per their pre-sale condition.
Hedge funds are pools of privately owned and managed alternative assets. These funds can invest in alternative assets where other types of investments – such as art collections and real estate – may be restricted.
Hedge funds are volatile and tend to require aggressive investment strategies, which come at a higher risk as its performance is independent of market conditions. They’re also not liquid, which makes them hard to convert to cash. Note that we don’t offer this product on our platform.
Alternative trading: a different approach
There’s a clear difference between trading and investing. When trading, you speculate on the rise and fall of the price movement of an underlying asset over the short or medium term. When investing, you buy company shares or ETFs and own these outright, which is often done with the market outlook over the longer term.
With us, you can use leveraged derivative products like CFDs for alternative trading. When you open a CFD account with us, you’ll be able to trade on the spot, futures or options on our award-winning platform.1
Remember that CFDs are complex derivative products. While leverage can increase your exposure at a percentage of the full value of the underlying asset, they’ll amplify your losses above your margin – always manage your risk carefully.
Best Finance App, Best Multi-Platform Provider and Best Platform for the Active Trader as awarded at the ADVFN International Financial Awards 2022.
2 Forbes, 2022
This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
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