Traditional investments aim for long-term gains from stable, consistent returns. Their strategy is oftentimes simple and conservative, gaining their value from accrued savings and appreciation. For contrast, alternative investments are typically shorter-term, higher-risk investments that use different strategies to maximize returns; these investment strategies are usually far more complex and require multiple layers of expertise to execute well.
While these two investment methods are quite different, there isn’t a clear-cut “better” choice. Each strategy has distinct pros and cons. When deciding how to build wealth, the debate of alternative investments vs. traditional investments is not a matter of either-or but what works best for you based on your investment goals, risk tolerance, and financial situation. Balancing these two types of investment strategies comes down to variables like capital size, financial objectives, market stability, and the interests of the investor.
With all of the above in mind, a good financial portfolio will look different from person to person, depending on what their goals are. As an investor, building your ideal portfolio requires a keen understanding of all your options. Keep reading to learn more basics about a traditional investment and an alternative investment.
What Are Traditional Investments?
Traditional investments are publicly-traded, well-known assets that aim for long-term dividends and appreciation. These investments are typically liquid, meaning that they’re easily convertible into cash with little loss of value. The most common types of traditional investments are stocks and bonds.
Despite being the more “conservative” investment strategy, traditional investments are not without risk. In fact, their greatest asset—liquidity—is also their biggest weakness. Traditional investments are liquid because they are a close abstraction of cash, and cash is the least stable form of wealth. Stocks, bonds, and even cash itself are volatile assets that are very susceptible to market fluctuations. Stock market crashes, recessions, and market collapses can all erase the value of traditional investments.
What Is an Alternative Investment?
Alternative investments are privately-held investments that aim to exploit market trends for larger, quicker dividends. They typically involve higher-risk, higher-reward investment strategies and assets that do not easily convert back into a cash form. A variety of alternative investments exist, such as real estate, commodity trades, hedge funds, and any forms of private equity.
Similar to traditional investments, the greatest strength and weakness of alternative investments both hinge on the same quality—and that is their risk-reward ratio. Alternative investment strategies are typically “riskier” because they are harder to predict and are largely unregulated. But because of this, making the best alternative investments can result in higher, far quicker returns. Additionally, many illiquid assets—such as property, resources, and commodities—may retain their value amidst market fluctuations, although this is not a guarantee.
It’s important to note that alternative investments, like all investments, carry some degree of risk. Alternative investments, similar to stocks, bonds, mutual funds, and exchange-traded funds, can lose value—even their entire value—if market conditions sour. You should carefully consider the risks of any investment prior to investing.
What Is the Difference Between Traditional and Non-Traditional Investments?
Traditional and non-traditional (or alternative) investments differ in a number of ways. Here are the main differences to keep in mind:
- Strategy | Every investment has a different goal depending on how much capital it uses, what asset it trades in, and what objectives it aims to achieve.
- Traditional investments seek slow-build, long-term gains with accrued value over time.
- Alternative investments aim for high-risk, high-reward turnarounds through targeted market exploitation.
- Liquidity | All investments sit on a spectrum between liquid and illiquid, which refers to how easily an asset converts to readily available cash and how much value it retains when converted.
- Traditional investments are far more liquid, bearing a close relationship to cash.
- Alternative investments are far less liquid and trade in more complex, niche assets that don’t always correlate to cash value.
- Asset Type | Investors can place their money in a variety of assets, each with its own strategies, subsectors, and investor class. These assets can be physical items, representations of wealth, or even abstractions of wealth, such as projections of future performance.
- Traditional assets are publicly-traded abstractions of cash, such as stocks and bonds.
- Alternative assets are privately-traded forms of wealth, such as private equity, real estate, and physical commodities.
- Wealth Type | The three tiers of wealth is a common paradigm for understanding what builds reliable, sustainable wealth. This framework has application in both finance, the global economy, and environmental science.
- Traditional investments are typically tertiary wealth: currency and any of its abstractions.
- Alternative investments are often secondary or primary wealth: resources (such as land, ores, and natural resources) or anything that is created from natural resources (such as oil, gold, and agriculture).
- Weaknesses | Every strategy bears a positive and negative side—investments are no different. Investment strategies focus on specific approaches for targeted outcomes, and each approach minimizes some types of risk but cannot eliminate all risk entirely.
- Traditional investments are subject to market volatility and economic fluctuations.
- Alternative investments are far riskier, far less regulated, and cost more to get going.
As always, it’s important to consult your financial advisor for advice whenever you are considering any investment moves to assess whether such investments are suitable for you based on your investment goals, risk tolerance, and financial situation.
Want To Learn More About An Alternative Investment?
There are many ways to learn about alternative investments, but ultimately the best place to start is talking with a knowledgeable advisor—namely, one that specializes in the investment type you’re seeking. As an example, we at i2 Advisors are experts in life settlements: we help investors with these unique assets and qualified life insurance policyholders turn their unwanted policies into cash they can use in the here and now. If you’re interested in learning more about life settlement investments, reach out to us.
THIS MATERIAL IS FOR EDUCATIONAL AND INFORMATIONAL PURPOSES ONLY. OTHER THAN LIFE SETTLEMENTS, I2 ADVISORS DOES NOT PROVIDE THE SERVICES DESCRIBED IN THESE EDUCATIONAL MATERIALS NOR DOES IT RECOMMEND ANYONE TO INVEST IN THE ASSETS DESCRIBED THEREIN. ALL INVESTMENTS CARRY RISK AND INDIVIDUALS SHOULD CONSULT WITH THEIR FINANCIAL PROFESSIONALS BEFORE UNDERTAKING ANY TYPE OF INVESTMENT. THIS INFORMATION DOES NOT CONSTITUTE INVESTMENT ADVICE AND SHOULD NOT BE CONSTRUED AS A SOLICITATION OR OFFERING OF ANY INVESTMENTS DESCRIBED THEREIN.