The Importance of Alternative Investments to Canadians

What Are Alternative Investments?

Offering different values and rate of returns, alternative investments are complex non-traditional investment assets that do not fall under stocks, bonds, and cash. They can be in the form of tangible assets such as equity, real estate, hedge funds, and financial derivatives, or personal possessions like precious metals, antiques, wines, coins, and commodities.

Are These Assets Liquid?

Compared to traditional investments, the liquidity levels of the assets in alternative investments are quite low. For example, real estate properties are not easily sold and converted to cash. Likewise, there are few buyers of antique pieces.

Economic Valuation

Non-traditional investment assets are complex in nature and have different economic values. Due to the difficulty in determining their real value, these assets are often susceptible to scams and fraud especially because government regulation is largely absent. However, serious threats can be avoided by observing proper assessment process.

An 1894 Karl Benz’s Velo antique French bicycle is an example of assets with indefinite economic value. This item has great value but proper pricing scheme is unknown.

Portfolio Diversification

When it comes to investments, placing funds in more than two investment tools reduces risk levels. In addition, diversifying a portfolio is likely to maximize yields. Consequently, many investors capitalize on stocks, mutual funds, real estate, and jewelry at the same time.

Different Types of Alternative Investments

Real Estate

Being the most secured form of alternative investment, real estate assets are residential or commercial properties which are available for either a short or long-term scheme. Investors may buy, sell, or rent them to the market. However, the problem with real estate is that it requires large capitalization, hefty tax payments, and sizeable maintenance budgets.

Hedge Funds

This type of asset is common among sophisticated investors. It typically requires significant asset levels of at least 1 million dollars as the initial outlay. Hedge fund investors have high-risk tolerance.
Venture Capital. Venture capitalists help startup companies or small businesses grow and expand. More often than not, banks and other financial institutions drive away these potential business owners.
Business Franchising. You can own a business through a franchise, wherein the franchisee abides by the standard procedures and branding guidelines of the franchisor.

Insurance

Whole life plans, annuity insurance, and retirement funds are alternative investment assets.

Foreign Exchange

Requiring minimal capital, many investors buy and sell different currencies through the foreign exchange (ForEx). The forex market does not sleep, so the opportunity for growth is high and fast.

Alternative Investments Are Important Assets for Financial Growth

By venturing into these types of assets, you can:

  • Get low transaction costs. Alternative investments have high initial capitalization but low transaction and maintenance costs.
  • Avail of tax benefits. Because these assets (i.e. real estate) are held on for more extended periods, they are subject to lower capital gains tax, especially when they are held for over 12 months.
  • Not worry about low market volatility. Alternative investments have longer lock-up periods. Because of this, properties have minimal exposure to fluctuating interest rates, and risks are kept to a minimum.

There is no magic equation when it comes to investments. Like in any other way of making money, persistence is required in order to succeed. But as always, a well-informed decision can truly make a difference. If you need expert advice on growing your money, get in touch with us.