What’s the difference between traditional and alternative investing?

What’s the difference between traditional and alternative investing?

By James Battison, moneywise.com

When investing your money, the key to success is diversification. But knowing how to diversify your investments is a skill in itself.

There are two overarching categories you might consider putting your money into. Traditional assets are probably the first things that come to mind when you think about investing. These assets include stocks, bonds, and cash, and have a proven record of generally giving you a return on your investment.

Alternative assets are those that lie a bit off the beaten path. These can include everything from collectibles, like comic books and sportscards, to energy, agriculture, and real estate. While these can offer a high return on investment, they also carry greater risk than other traditional investments.

Traditional assets

Stocks, bonds, and cash are the main pillars of traditional investing. Purchasing stocks in a company gives you partial ownership of it, meaning that you get you to share in their profits – or losses. There are a variety of ways to start investing in the stock market; for instance you can purchase individual stocks in a domestic or foreign company, or invest in an index like the S&P 500 that is composed of a number of companies. The easiest way to invest is my doing so through investing apps , where you can manage your own trades from your mobile phone.

Bonds are when you lend money to a company at a fixed-interest rate, guaranteeing a return on your investment. Bonds are generally issued by the government or corporations, and while they typically offer less growth than stocks, the insurance that you’ll receive some profit means they are a great way to help balance out your investment portfolio.

The old adage that cash is king still has a place in modern times. Cash and cash equivalents are liquid assets, or things that can be exchanged or sold with little impact on their value. Holding cash, Treasury Bills, or money market assets ensure that you can navigate the financial waters even if your other assets are sinking.

Spreading your money across these assets is a great way to start your investment portfolio, but if you’re looking for the potential for greater reward, you might want to consider alternative assets as well.

Alternative assets

Alternative assets include real estate, venture capital, foreign currency, even things like collectibles and insurance products. Alternative investments are an excellent complement to traditional assets, as they offer the opportunity for greater growth especially over the long-term.

Real estate is one of the most common forms of alternative investments – if you own a home, you’ve already got this investment. Real estate generally appreciates in value, so once you own a property, your equity is building. But real estate isn’t limited to the home you live in. For example, you might choose to invest in a Real Estate Investment Trust, or REIT. These trusts let you invest in large-scale projects, like shopping malls, office buildings, and other commercial properties. By investing in an REIT, you share in the ownership of the property, and share in the profits as the spaces are rented and leased out.

Commodities are assets that are traded and marketed – and are in constant demand. The four main categories of commodity investing are agriculture, energy, livestock, and metals. Gold is one of the more common commodities that investors use to diversify their portfolio, but looking to things like farmland and sustainable energy are popular in that their demand is increasing – while the supply is limited.

Collectibles are a fun way of turning a hobby or interest into profit. Collectibles can be anything from comic books to sportscards, from artworks to bottles of wine. Investing in collectibles is riskier than some other alternative investments, as it’s highly speculative and value is solely based on what individuals are willing to pay for an item. If you’re looking to start investing in collectibles, be sure to do your research first, or consider using an online service like Masterworks or Vinovest that allows you to become a fractional investor.

Some other common alternative investments are foreign currency, insurance products (like life insurance), venture capital (that is, investing in a startup business), private equity (investing in companies that aren’t publicly traded), and distressed securities. Distressed securities are those from companies that are either bankrupt or approaching bankruptcy. These can often be purchased very inexpensively, and have the potential of great returns should the company rectify its situation.

Whether you’re looking at investing in traditional or alternative assets, it’s critical that you do your research. You want to know what it is you’re putting your money into, and be aware of the risks involved in your investments. And always keep in mind that diversifying your portfolio is crucial, as it ensures that if one of your investments fail, others can still be profitable