September 20, 2010

The financial crisis has really affected the wealth of a lot of people. When people are losing money they look for something else. People have been turning towards alternative investments as an option. As with all investments there are risks involved and these are areas that we will look at.

Why are alternative investments a good idea? Well many of them have a low correlation with traditional assets. This means that if one falls then it doesn’t necessarily mean the other one will too. This uses an extra amount of diversification to try and protect your wealth.

I just want to go over why it is so important to diversify through alternative investments. Traditional investments such as stocks, property, bonds and cash have performed badly on average. If you compare the value of the stock market to its value 10 years ago you will find that it is lower. We have seen the fall in credit that has brought house prices down with it and interest rates at historically low levels meaning we don’t get a real return on our savings.

This is not to say that all alternative investments are a great idea. You just need to be open to the idea. Investments in antiques, art work and stamps etc. all have disadvantages too.

What are some of the negatives? The marketplace hasn’t many traders and therefore there is a lack of liquidity. If one day you decided to sell then you can’t just sell for the market price because there isn’t one. This means that you have risk of not being able to liquidate your position if you need to.

A further disadvantage of alternative investments is the lack of data required to establish a price. The marketplace is not big so it is difficult for a fair value to be established. If you don’t have the right information or knowledge then you are at a serious disadvantage. On the flip side, if you do learn about it then there will be opportunities there.