How-To Reduce Risks When Investing in Alternative Investments

Every investor is looking for valuable insight on how to reduce and minimize risks, especially when considering investments that may not be so mainstream. Here are some investing tips to help you reduce risks when investing in alternative investments:

If The Investment is Out of Country, Find a Broker.
Emerging Markets are a great place to find alternative investments. Given that, each market has its own set of rules and guidelines to follow. I have found the best practice is to hire a broker who is located in the geographic area of interest, and who understands the marketplace well. This can greatly increase an investor's confidence.

Stay on Top Of Your Investments.
With regards to alternative investments, often times you are the one managing your own portfolio. If this is the case, it is critical that you conduct in-depth research to remain on top of every investment. This is made easier in some industries if you hire an asset manager or some sort of financial planner, but ultimately you must understand that the final decisions are yours. If you don't stay on top of these things, your investments might not turn out the way you had forecast.

Invest in Different Industries.
Do not just leave all of your investment money tied up in 1 or 2 industries. Think about nontraditional investments and create a strategy and portfolio that includes a mix of different industries (green technology for example), while keeping some steady and lower risk investments (like real estate or shipping containers).

Always Seek Out Advice And Testimonials.
One of the best things you can do for alternative investments is to research and ask questions. If you are considering an investment type that you are not familiar with, pick up the phone and call the broker. If they cannot provide you with testimonials from current investors, then use the internet and seek out answers for yourself.

Although you can count on these tips to help you reduce risks when investing in alternatives, it is important that you determine what your threshold for risk is, before beginning your investment search. Once you correctly identify for tolerance, you will know exactly what you are working to reduce.

Do Traditional Investments Offer Steady Profit/Peace of Mind?

The market's ongoing volatility has driven much of the investment community to seek alternative investing options, that can offer them steady returns and peace of mind.

With the everyday uncertainty in the stock market and repeated disappointment in gold and other precious metals, investors are disheartened to say the very least. The market's ongoing volatility has driven much of the investment community to seek-out other investing options, that have demonstrated they can deliver steady returns AND peace of mind. As traditional investments continue to under-perform, these two ingredients (steady returns and peace of mind) are becoming increasingly important to investment-seekers everywhere.

Investors Want Steady Returns.

Nowadays investors are keeping a watchful eye over their investments' performance and their rate of return. For the most part, investors like steady profits that they can see and count often. Offerings like container investments produce monthly returns, that can be used to fund other investment endeavors or supplement income. On the other hand, long-term investments that involve bank rates, bonds, currencies and/or real estate are (often) subject to a number of political and economic risks, that can have a seriously damaging effect.

Investors Want Peace of Mind.

The bottom-line: investors do not want to have to worry about their investments. The worrying should be done before the decision is made to invest. With that being said, when seeking a good investment, one of the criteria is definitely peace of mind. Understanding how an investment works, how and when investment returns are paid, as well as liquidity options, have grown increasingly important to investment-seekers. Once those details have been established, peace of mind will follow.

When reviewing an offer to invest, it is wise for investors to focus on satisfying the criteria above (steady returns and peace of mind), especially if they hope to move painlessly from the traditional investment roller-coaster ride, to the sanctuary of proven alternative investments.

Investors Seek Alternatives to Traditional Investing Options

Every investor has felt the urge to seek alternatives to traditional investing options and live life on the proverbial edge.  It’s no secret that investing in traditional stocks, bonds and mutual funds can sometimes become a bit boring.   How one can profit from alternatives can sometimes be more difficult at the early going, especially if the investor is a novice.  It is always wise to seek guidance along the path to knowledge of non-traditional investing.  Have a professional fund manager, or investment broker review alternative investment vehicles with you, at least in the beginning. Boring can be predictable, and non-traditional investment options hold an elevated risk. Alternatives may not be for everyone.

Alternative vs. Traditional Investments

Morgan Stanley produced a great tool highlighting the inherent differences between Alternative and Traditional investments, as seen below. Their opinion concludes that Alternatives can lower volatility and add diversification 1 to an investor’s portfolio.

Alternatives for Investors

Alternative investment strategies are considered those that are beyond the reach of equity and traditional fixed-income markets. What were once high risk, low participation investment vehicles: venture capital, real estate, hedge funds and (NTMF) non-traditional mutual funds, are now just some of the options today’s investors may find lucrative.  Other alternatives for investors are infrastructure funds, climate related investments, global shipping containers, and hard assets, like precious metals, oil and gas, to name a few. One can profit from the economic growth right here at home, say, fracking operations. There is even a belief that sports betting and other forms of gambling are viable and legal alternatives for investors. The jury is out on that one, as far as I am concerned. Speaking of hedge funds, in September of this past year, Bloomberg reported, "Billionaire investor Warren Buffett compared the U.S. Federal Reserve to a hedge fund because of the central bank’s ability to profit from bond purchases while accumulating a balance sheet of more than $3 trillion." Now that is an alternative of a different color. Another alternative for investors lies beyond domestic shores.  An investor can profit from the economic growth in countries experiencing rapid evolution in stability. Rising incomes per capita and lower cost of food are great indicators of possible investment locations.  Imagine investing in the implementation of electricity to a Sub-Saharan country, thereby opening up opportunities for lifting millions from poverty. Some are not even recognized as alternative investments.  Berkshire Hathaway (BRK) is a fine example of what is considered traditional, yet is in fact managed like an alternative. Blending a variety of companies and industries with derivatives under a single brand, thereby managing risk, and sold on the stock exchange make for a non-traditional alternative.

Caveats to Alternative Investing

There are many alternative investment opportunities which have a steep barrier to entry. That is, although they might have less regulation over them, they may have significantly higher minimums, performance and management fees than do ETFs and mutual funds. Being subject to less regulation may sound appealing, but it also allows limiting published information and financial performance data that is much less than is ideal. Because alternative investing requires a significant amount of knowledge and experience, schedule a review of alternative investments with an experienced certified financial planner or investment brokerage.   As for alternative investing options for retirement go, the use of your 401K or IRA can cost dearly when a prohibited transaction occurs.  Because an individual cannot make financial gains directly in such a scenario, avoiding real estate investing is a sound idea.  Failing to follow regulation may result in higher tax burden, as doing so may remove the tax deferred status of your portfolio.   In the end, only the investor can decide which investment vehicles are the right fit.  There are always new strategies and tactics emerging, so if not now, some day the right alternative may present itself.

Add These 2 Tips To Your Alternative Investment Tips For 2014

With gold set to close at its lowest level since 2000 and the stock market's volatility causing ongoing concern for international investors, 2014 will certainly be the year that the investment community rethinks their traditional investing strategies and reconsiders their position on investing in alternatives. Although for years many investors have been apprehensive about including nontraditional holdings in their investment portfolio, the uncertainty and under-performance of traditional investments that characterized much of 2013, will be a strong motivator for the investment community in 2014.

Tip 1: Look For Alternatives to Gold Investments

Perhaps one of the most challenging things for many investors to accept is that gold is not likely to return to its days of glory, when values rose to $1800+ in 2011. The current economic conditions, although tumultuous, are not synonymous with the right environment for gold to skyrocket; and will not be for the foreseeable future. Instead of gambling on economic woes, investors would be wise to review their investing alternatives and consider the advantages of investing in shipping containers and other hard assets, that have delivered strong performances and great returns for investors; in 2013. Albeit gold is likely to remain a small part most investment portfolios, its role will diminish along with its appeal, as investors seek other alternatives to the precious metal.

Tip 2: Look For Alternatives to Stock Investments

The trouble with the stock market anywhere is that it is heavily influenced by political, corporate and economic conditions, which for the most part, investors are helpless to control. Whether it be political remarks that start a war or corporate comments that spark a scandal, the investment community is at the mercy of politicians and corporate officers. After the industry's indiscretions were exposed post-2008, investors are demanding transparency and more control over their investment decisions. This is leading most investment-seekers away from equities and toward investing alternatives.

There are those who believe that the stock market in the United States is in need of a correction. Many say that leading stocks are overvalued and that prices need to fall, much like gold has, to a figure that is more inline with what is practical. Regrettably there are going to be unfortunate investors who will be unprepared and suffer unexpected losses, when the correct values are realized. On the other hand there will be members of the investment community who had foreseen the impending doom and eliminated the unnecessary risk, by reducing their stock holdings and replacing them with alternative investments that invest in global trade and profit from economic growth.

Investors Seek Opportunities That Invest in Economic Growth

With steady economic growth being experienced around the world, the financially devastating events of 2008 are beginning to wane in investors' minds. Although for the most part the confidence of the investment community has return to pre-GFC levels, investors have changed their investment strategies so as to more closely align themselves with industries and sectors that consistently profit from investing in economic growth. One such industry at the forefront, is the global shipping container industry.

The economies of the world are stimulated by trade. Established container lines have been profiting from this for decades. The import and export of consumer goods, predominately through the use of cargo containers, fuels the growth of regional businesses, supports growing populations and improves GDP. Thus, as the need for consumer goods increases and officials establish higher economic goals, the demand for shipping containers and shipping services can be expected to mirror the growth. This creates opportunities for both shipping companies and investors, to profit from the continuing economic prosperity.

Although growth in some well-established nations in Europe and North America is not as favorable as the emerging markets in Asia and South America, the shipping industry deploys their maritime assets, like shipping containers; in the regions that are demonstrating the need. As demand rises in other areas of the world, it becomes increasingly important to invest in shipping containers, as well as shipping vessels; to accommodate growth in economies everywhere. The fact of the matter is, a rise in economic growth is a rise in revenues for shipping companies and container owners.

Affluent Investors Use Alternatives to Guard Against Risk

Although equity markets may have hit all-time highs, the investment community has not forgotten the meltdown in 2008 that resulted in a stunning 40 percent loss, and as such many are asking their money mangers and investment advisers to help protect their wealth against another fallout. In response, fund managers are shifting their client's assets away from the "bubble-prone" stock market and into alternative assets, like real estate, commodities and shipping container investments; that have repeatedly demonstrated that they can accommodate for stock and bond market risks.

"Alternative products are attracting interest from retail and institutional investors, as both are increasingly looking for portfolio diversification, enhanced returns and risk management,"- Associate Director at Cerulli Associates.

In fact, a research study by Strategic Insight reported that the most important reason for the recent move away from stocks by affluent asset managers, has been the need to "diversify their investment holdings; so as to protect their clients' assets." Moreover, the study also concluded that the amount of money invested in alternative (or nontraditional) investments, particularly those offerings that have little or no correlation to the stock or bond market, will rise considerably over the next five years.

"Alternative funds have more than doubled since 2008 and could do so again in the next five years,"- The Strategic Insight Report.

The study by Strategic Insight also forecast that the use of alternative assets will go from 2 per cent of total mutual fund assets to 14 per cent over the next decade, with the amounts in alternative mutual fund assets likely growing from approximately $245 billion currently, to $490 billion in 2018.

Whether the immediate state of investment anxiety is the result of the recent U.S. government shutdown and/or the historically low interest rates, investors are choosing to keep large amounts of cash as well as alternative assets. In doing so, investors can avoid the uncertainty of the world's stock and bond markets and stay ahead of rising inflation.

What Are The Types of Investment Risk When Investing?

People with less disposable income tend to be, by necessity, more risk averse. On the other hand, day traders feel as though if they are not making trade after trade everyday, there is a problem. In most instances, these high-volume traders are motivated by the belief that more risk can equate to more profits. Albeit true in some instances, it is wise for investors to completely understand that investing involves risk and that there are different types of risk that can adversely affect their investment return. With that being said, here are 8 risk factors to consider, before pursuing an investment opportunity of any kind.

Foreign-Exchange Risk: When investing in foreign countries you must consider the fact that currency exchange rates can change the value of the asset as well.

Credit or Default Risk: This is the risk that a company or individual will not be able to pay the interest or principal on its debt obligations. This type of risk is very concerning for investors who hold bonds in their portfolios.

Systematic Risk: A significant political event, for example, could affect several of the assets in your portfolio.

Unsystematic Risk: An example is news that would affect a specific stock, like a sudden strike by employees.

Country Risk: This is the risk that a country will not be able to honor its financial commitments. This can also harm the performance of other investments in countries the default country has relations with.

Political Risk: This represents the financial risk that a country’s government will suddenly face if it changes its policies.

Interest Rate Risk: This is the risk that an investment’s value will change as a result of a rise/drop in interest rates. This risk affects the value of bonds more so than stocks.

Market Risk: This is the most familiar of all risks. Also referred to as volatility, market risk is the day-to-day fluctuation in stock market prices.

An aggressive investor, or one with a high risk tolerance, is someone who is willing to risk losing money; to potentially earn a better return. A conservative investor, or one with a low risk tolerance, often prefers investments that are more likely to maintain the original investment value. It is important for you to identify what kind of investor you are and determine how much exposure to risk you are comfortable with, before investing. This approach will increase your odds of choosing the investment offerings that can deliver long-term investing success and profits with less associated risk.