Exploring Alternative Investments To Diversify Income

Income is central to financial life, whether as an individual or a business entity.

Hence, having single source of income will not take one very far in the current socio-economic environment. To this end, there is the need for multiple income sources through several investment windows.

While building a strong investment portfolio, it is important to consider several investment options.

Diversification is a critical consideration when building a portfolio as it helps to spread risk across various assets whilst ensuring that financial goals are attainable. As a result, it is always advisable to have a balanced mix of traditional and alternative investments in any given portfolio.

Traditional investments include stocks, bonds, and cash. Any other financial asset that does not fall under the conventional investment definition is classified as an alternative investment.

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These alternative investments include; real estate, private equity, venture capital, infrastructure, distressed securities, hedge funds and collectables-such as; artwork, antiques, vintage wines, stamps-and several others.

Alternative Investments have a low correlation with traditional asset classes, making them suitable for portfolio diversification. Investments are generally long-term, close-ended, and unlisted.

Alternative Investments

Alternative investments, according to FBNQuest, have been around for decades but have gained significant traction in recent years.

According to the Investment firm, volatile money market returns coupled with evolving attitudes towards wealth building and the emergence of an innovation culture have generated interest in alternative investment strategies.

“We have seen an increase in investors embracing unconventional strategies such as crowdfunding schemes, cryptocurrencies, and early-stage venture capital. Given this demand and the increasing flight for yield, the market has seen a rise in alternative investment product offerings globally,” it stressed.

A recent McKinsey & Company report, shows a current surge in alternative investments is only the beginning of a new wave of growth. The report states that institutional investors are exploring new paths and increasing their allocations to alternative investments. It also suggests that alternative investments are increasingly becoming mainstream.

Factors Affecting Alternative Investments

There are a number of reasons why alternative investments are rising in relevance to investors. A few of them are:

Many alternative investments offer more attractive returns than traditional investments. Given the active management involved in some alternative asset classes, as well as the long-term holding periods, there is a likelihood of generating superior returns.

Given the low correlation of returns with traditional investments, the inclusion of alternative investments in a portfolio provides great diversification potential by spreading risk across multiple assets.

Investors are exposed to reduced volatility given low correlation with traditional asset classes. This provides portfolio stability in the long-term.

Alternative Investments provide investors with a variety of options that are not readily available in other asset classes.