The term "alternative assets" sounds like something an ordinary investor knows nothing about or has no way to access. Both accounts are fake. You may be thinking, what do I know about these so-called alternative assets? Probably more than you think.
Contents Real estate investment Gold and precious metals Gold performance in 2020/2021CommoditiesOther detailsFinal resultI had the same feeling when I had the idea of studying the CAIA charter. Yet, while going through the topics, I realized that I knew or had heard of these actives before. I just didn't know they were called alternatives.
You've probably heard of a few of these assets. For example, real estate, gold or commodities. Yeah, it's as simple as that. There are also more sophisticated assets like hedge funds and the like. Let's stick to basic assets that are easy to understand and invest in.
We'll look at what assets you can add to your investment portfolio that aren't traditional stocks and bonds. Adding alternative assets allows you to protect your portfolio from market shocks and can help hedge against inflation.
Real estate investing is probably the most common asset after stocks, how many of us own a house? It is also real estate investment. Of course, you might want to make other investments in real estate. But what if your savings aren't enough to buy another house or apartment?
You can invest in REITs. These are companies that invest in and operate real estate. They are publicly traded, just like common stocks. Publicly traded stocks allow you to participate in the income and capital growth offered by real estate at a fraction of the total investment cost.
REITs are also easy to sell in case you need a return on your investment. Since they are publicly traded, it won't take you months to sell your real estate investment.
These companies are experts in the field, so you don't need to learn the trade. They also invest in and operate all kinds of real estate such as hotels, shopping malls, and cell towers. You can learn more about investing in REITs in this guide to investing in REIT stocks.
Gold has been a custodian of value for thousands of years, and that aspect doesn't seem set to change any time soon. Gold is generally known for its durability, malleability and attractiveness. But nowadays it is also widely used in electronics and various industries.
Simply put, the demand for gold is very unlikely to decline. Not only is there an increasing demand for the manufacture of various products, but also an increased demand for jewelry. China and India account for 50% of global gold demand. The fact is that their economies are growing at a galloping pace. As the citizens of the countries get richer, their demand for gold is also likely to increase.
Gold is known to retain its value over time no matter what. The price of gold is completely unrelated to what the stock and bond markets might do. Basically, it has a life of its own, where a stock and bond market crisis just doesn't spread.
Take a look at the coronavirus crisis in 2020. The Dow Jones Industrial average has fallen by around 40%. How did the gold do? Gold continued to rise at first, then only lost 12%. This smaller drop represents a lot of protection for your portfolio.
More importantly, gold continued to rise, True shares have seen a dramatic rally from the corona sell-off low. But looking at the performance of the past 2 years, since September 2019 gold has risen 52.15% while the Dow Jones has risen 39.88%
You may or may not want to physically hold gold, although the matter is easier than it sounds, as various companies can take care of storage and transportation for you. Gold bars also fit into your IRA, you can get more info on how it all works here.
If you don't want to own the physical asset directly, you can always buy a gold fund. There are many, and perhaps the easiest way is to use an ETF on gold or precious metals. On the ETF database website you will find a list of gold ETFs.
If you want to broaden your horizon, you can opt for a precious metals ETF. They usually contain several of the most precious metals like palladium, gold, platinum or rhodium. These funds hold physical stakes in commodities. However, you will also find ETFs that invest in mining companies or futures.
Not all products are made the same. The list of commodities ranges from things like corn and wheat, or natural gas and copper. One thing is certain, they are needed at different levels of production and consumption.
As with all portfolios, if you are considering investing in commodities, choosing the winning horse can be difficult. Also, you want to diversify your risk by investing in a basket of commodities rather than choosing one or two in the hope of spectacular returns.
The easiest way I see to access a varied commodity investment is to invest in an ETF. There are several managed by reliable and competent asset managers. There is a good listing on the ETF Database website that lists ETFs by asset size.
These ETFs can invest in a specific type of commodity, such as crude oil or bulk transportation. Usually they attempt to mimic a broad commodity index using futures contracts. The choice of futures contracts is convenient.
The fund avoids the cost of having to keep merchandise stored in a warehouse. They also have a market to invest in, which is usually active and therefore liquid, which makes it easier to buy and sell their commodity positions.
Looking at the list of 25 ETFs, you will see that the lowest return for the current year is 14.62%, and the highest, bulk shipping, is 226.75%. The Dow Jones is up 18.7% so far this year, of the 25 ETFs on the list, all but one have performed better so far.
If size matters to you, the largest fund with $6.8 billion in assets has grown 44.9% so far. It invests in a broad base of commodities and uses futures contracts to make its investments.
Holding alternative assets in your investment portfolio just makes sense. They provide another source of income. You will have a diversified portfolio that reduces your overall risk and significantly reduces your exposure to stock and bond markets.
Gold and commodities in particular seem to have the ability to defend your investment against high inflation surges. If inflation increases, it is very likely that the rise in the value of commodities is part of it. So it's like having an asset that can benefit from high inflation and protect more of your wealth in a downturn.
