Many people have suffered large losses as a result of the financial crisis
. These large losses have made people seek out alternative investments as a way of protecting themselves. These investments do themselves come with risks and we will be looking at some of these today.
The main reason why many individuals are looking at alternative investments is because the returns have a low correlation against other traditional assets. This means that when we have financial events like we have had recently, your entire wealth doesn't take a hit. There is a level of further diversification in there which helps to protect you.
Why is it important to diversify? Traditional investments like stocks, cash and property have all performed badly over the last number of years. The stock market has performed poorly for even longer as it is lower than it was 10 years ago. Cash, although it gives you flexibility, is likely to lose real value at the moment.
I am not saying to blindly invest in alternative investments such as art, antiques or stamps etc. There are drawbacks and I will talk about these too. You do need to have an open mind to them.
The biggest disadvantage is the stock market's big advantage... liquidity. It can be risky investing in a market with a lack of liquidity because even though the asset might have risen in value you may not be able to sell and lock in the profits when you want. If there are no buyers around then you might not be able to sell.
A further disadvantage of alternative investments is the lack of data required to establish a price. Where the market is small it often struggles to agree on a fair price for an asset. If you don't have the right information or knowledge then you are at a serious disadvantage. That said, if you were to learn a little about the market then there are huge profits to be made.