Traditional investments and alternative investments differ in many ways, including strategy, asset type, and more. To develop a strong portfolio, it’s important to understand how each investment type factors into building wealth. Keep reading to learn more about alternative investments vs. traditional investments.
Traditional Investments and Alternative Investments: 3 Key Differences
The main differentiators of traditional and alternative investments boil down to three concepts:
- Strategy
- Liquidity
- Assets
Let’s look at each of these factors individually in relation to both types of investments.
1. Investment Strategy
Every investment has different objectives depending on its terms, risk levels, and desired returns. Traditional investments, for example, aim to build equity slowly over time through publicly traded securities such as stocks and bonds. These long-term strategies are often seen as the safest investments because they are more conservative than alternative investments and require less capital. But it’s important to understand that with all investments—traditional and alternative—there is a certain level of risk. While traditional investment funds, such as mutual funds, are relatively safe, other traditional investments—like stocks—are fairly susceptible to market fluctuations.
Conversely, an alternative investment uses more capital and goes for higher-risk opportunities, but the payouts are often larger and come in quicker time frames. While alternative investment strategies are inherently riskier, they deal in assets that may be more stable, such as real estate and commodities. You can, however, lose a lot of money very quickly if you don’t have the expertise to make good decisions. Additionally, alternative investment strategies are typically far more nuanced, fast-paced, and complex. As such, alternative asset management will typically require extensive help from an advisor—one who will charge fees and/or take commissions off of your returns.
When looking at investment strategies, remember that all forms of investment bear some type of risk. A good portfolio requires a keen balance of risk and reward that is appropriate for your investment level. 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.
2. Investment Liquidity
For financial assets and securities, “liquidity” refers to two traits:
- How easily an asset or security can be converted back into cash
- How much value that asset/security retains when converted to cash
Liquid assets are either easily convertible to cash or lose a high amount of value when they are converted—oftentimes both. On the other end of the spectrum, illiquid assets either do not convert easily or retain nearly all their value when converted. As a general rule, most traditional assets are fairly liquid and most alternative assets are fairly illiquid. Liquidity affects what investment strategies will be most effective for an investment. Real estate, for example, is a fairly illiquid asset that cannot be quickly converted for cash, but will generally retain its cash value when it finally is converted. This means it may not be in an investor’s best interest to convert properties, but continue to trade using those properties.
Once again, a balance across the spectrum of liquidity may be important to meet your goals. Liquid assets may help improve your portfolio’s flexibility, while illiquid assets help your portfolio retain a certain amount of value.
3. Investment Assets
Investors may build a portfolio with assets all across the three tiers of wealth. Assets in tertiary wealth, such as bonds, stocks, and crypto, are far more liquid but also far more volatile. Secondary wealth, such as commodities, houses, industries, and production futures, are less flexible but generally more valuable over time. And lastly, primary wealth assets like land, natural resources, and ores, are the pinnacle of wealth that will retain their value as long as those resources exist.
Generally, traditional asset classes deal in tertiary wealth, using abstractions of currency to slowly build value over time. And alternative investments typically deal in either secondary or primary wealth, trading in physical assets or the market projections of said assets. One portfolio strategy may aim for a presence in all three tiers of wealth, which provides flexibility, wealth accrual, and value retention.
What Are Some Types of Alternative Investments?
Alternative investments come in a variety of forms, such as the following:
- Commodities | Physical assets with high value, such as collectibles or items in high demand
- Real Estate | Trading in properties, homes, or the future of the housing market
- Alternative Funds | Funds that employ nontraditional investment strategies, typically requiring management through an expert advisor
- Life Settlements | A life settlement is the sale of a life insurance policy to an investor in exchange for a lump sum payment. The amount received by the policy owner is less than the death benefit, but more than its cash surrender value of the policy. 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.
What Is an Example of an Alternative Fund?
“Alternative funds” can refer to either a specific type of security, or a class of securities.
First, let’s talk about the specific security called “alternative funds” (also known as alt funds or liquid alts). Alternative funds are publicly traded mutual funds that employ non-traditional investment strategies. Their investment strategies are similar to hedge funds, so alt funds are sometimes marketed as “hedge fund-like options” to investors. For example, an alt fund may use a “market neutral” strategy, which seeks to turn a profit even if stock markets fall. Unlike hedge funds, however, alt funds are far more regulated with safeguards and much more publicly accessible.
“Alternative funds” can also refer to a type of fund with more complex, risky investment strategies than traditional investment funds. Hedge funds, for example, are a type of alternative fund: they collect high amounts of capital from upper-class investors and use the combined power of that capital to better leverage market returns—thus, “hedging” the risk for each individual investor. Hedge funds are not publicly traded and will almost always require a minimum buy-in that purposely excludes anyone who is not in the 1% of investors.
If you’re interested in alternative funds or any form of alternative investment, consider finding an advisor or manager who is an expert in the specific type of investment you’re seeking. Most alternative investment strategies require the help of an expert financial advisor. For example, if you’re looking into life settlements, you should work with a reliable life settlement broker like us at i2 Advisors. If you’re curious about how life settlements could work for you, visit our website to see if you qualify or reach out to us with questions.
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.