Generally, investments break into two categories: traditional and alternative investments. Traditional investments are the long-term, interest-focused investments that most think of when planning for the future: stocks, bonds, and other cash equivalents that aim for accrual over time. Alternative investments, on the other hand, typically provide short-term strategies that are more complex but can yield higher payoffs. Both provide different pros and cons for investors, and both can be essential when creating a balanced, resilient portfolio.
Investments come in a wide variety of types; if you can think of an idea or thing, there’s likely a number of ways to invest in it. And as you’re working towards amassing wealth, it’s important to understand the basic types of investments, what their goals are, and how best to get involved. Keep reading to learn more about alternative investments vs. traditional investments and both of these investment methods.
Remember, though, 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.
What Is an Alternative Investment?
Alternative investments are any investment that uses nontraditional assets, terms, or investment strategies. They typically use riskier strategies and trade in complex assets that are not easily convertible into cash, but may more easily retain their value. The strategies for alternative investments may be more nuanced and complex than their traditional counterparts, requiring the help of a knowledgeable advisor. Some examples of alternative investments include hedge funds, exchange-traded funds, commodity futures, and collectibles.
Alternative investments exist opposite of traditional investments: publicly-traded, well-known investments that typically achieve capital gains through long-term strategies, interest, and appreciation. Many common investment types—stocks, bonds, and investment accounts—are traditional investments.
What Is a Traditional Investment?
Traditional investments typically use simple, long-term strategies that aim to accrue value over time. They often involve slowly adding money to a security, such as stocks or bonds, to build up wealth.
What Is a Popular Strategy To Invest Money?
One common investment strategy is a combination of tactics and investment types. These portfolios are diverse: a collection of investments across types, terms, and cost. It’s can be easy to get caught up in thinking that one type of investment is better than another—such as thinking safe long-term investments are better than riskier short-term investments—but every investment strategy bears risks and rewards.
Any portfolio that lacks diversity may be subject to loss of wealth. For example, if your portfolio is made of all stocks, then a stock market crash will wipe out its value. Similarly, a wealth amassed entirely of real estate is weak to a housing market collapse. No investment or investment strategy is completely without risk.
Which Investment Is Typically the Riskiest?
The answer to this question is not as simple as it might seem. How you define “risk” as an investor is largely subjective to your goals, starting capital, and investment strategies. For example, a hedge fund uses a “riskier” investment strategy, but it pads that risk by aiming to compile large amounts of capital from multiple investors. Conversely, a savings account is a “safer” strategy that doesn’t pull large amounts of capital, but can be vulnerable to a single point of failure—say, an economic recession—that could effectively undo decades of investment in one fell swoop.
All investments bear one form or another of risk. With this in mind, the riskiest investment is not a type of investment. Rather, the riskiest investments may be of the “all eggs in one basket” type. Instead of focusing solely on the risk level of each investment, it’s may be better to focus on diversification: making multiple types of investments with different strategies, markets, and weaknesses.
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.
How Should I Start Investing With Little Money?
No matter how much money you’re starting with, there are several things you can do to get going in the investment world.
- Slowly feed cash into long-term investments. Setting aside a small piece of your income (as little as 5%) will add up quicker than you may realize. It doesn’t require a complex strategy or high amounts of capital to make a net-positive investment. Even something as simple as a savings account with a steady interest rate can help you build dividends over time.
- Study markets that align with your interests. One of the easiest ways to become financially literate is to translate it through your personal hobbies or passions. For example, if you’re a wine drinker, consider buying stock in vineyards (traditional investment) or maybe even becoming a wine collector (alternative investment). Not only will this drive your ability to learn, but you will make better financial decisions because you are more knowledgeable about that interest.
- Diversify your portfolio. As you build your portfolio, you may find it better to spread your wealth across multiple investments rather than putting all your eggs in one basket.
- Work with a trusted advisor. Financial advisors exist at all levels of investment and for each investment type. For example, we at i2 Advisors specialize in life settlements: a way for policyholders to sell unwanted policies for a cash value much higher than their surrender value. We have decades of experience as life settlement brokers, and can help any new clients navigate the financial landscape with confidence and ease. Life settlement investments are not without risk. You should carefully research the risks surrounding life settlements and discuss with a professional who is well versed in this field to determine if life settlements are a viable option for you.
We hope this article has helped you think more about investment strategies and how to build your portfolio. If you’re interested in alternative strategies, you should reach out to a skilled advisor for more information. And if life settlements sound like the right investment for you, visit our website for more information or use our qualifications calculator to see if a life settlement is a good fit for you.
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.