Definition of Alternative Investments
Anything other than traditional investment vehicles such as stock, bonds, treasuries, futures, options, real estate and even precious metals can be thought of as an alternative investment. While most alternative investments can also be thought of in terms of collectibles, such as art, historical artifacts, rare coins, figurines and so forth, the term "collectible" may garner you unfavorable tax treatment by the IRS and should be avoided. While alternative investments aren't for everyone, they can be an excellent way to manage risk and diversify your portfolio.
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Characteristics
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Typically, alternative investments all share the following characteristics:
- They have a low correlation to traditional investments, that is to say, the price of a piece of art is not likely to be as dependent on how a particular sector is doing as equities are.
- They come with a lot of uncertainty due to the fact that most alternative investments are relatively illiquid and, as such, little market data is available for use in deciding a market price.
- They come with higher transaction costs, usually because alternative investments are exchanged at auction.
- They take significantly more research than traditional investments and successful investors must become virtual experts in their field.
Common Alternative Investments
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More common alternative investments include art, rare coins, artifacts (such as items found in a museum), figurines, comic books, sports cards and memorabilia, hedge funds, private equity placement and stamps.
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Make Your Investment Your Hobby
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To become successful in alternative investments requires a serious commitment of time. This is because the market isn't as transparent as traditional financial markets are, meaning that you are left to do much of your own research. By investing in your hobby, you will learn about something new, become more involved in your area of interest and ultimately enjoy what you are doing. Many success stories about comic book collectors or art collectors stem from people doing what they liked.
Get Involved With Your Particular Investment Community
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Establishing contacts within your area of alternative investments is critical. Since you will be dealing with a much more limited group of people than you would in the traditional investment world, it's important to develop relationships with these people. They can also serve as your educators and mentors when you are getting started and they can help you avoid potentially costly mistakes. These contacts can also assist you in liquidating your assets when that time comes.
General Tips
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Some basic tips to follow, regardless of the specific alternative investment you choose to pursue:
- Buy the best you can
- Look for pedigreed items (those with a traceable/documented history)
- Conduct thorough research on each and every item you purchase. Due diligence pays!
- Don't expect to "flip" your investments
- Buy low and sell high
- Have fun!
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References
Resources
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