Tag: mutual funds

  • Beginner Investment Portfolio- How Should It Look Like?

    Beginner Investment Portfolio- How Should It Look Like?

    Beginner Investment Portfolio
    These tips are kind of a guide to new investors for building a good stock portfolio. Selecting stocks needs analysis, time, and the ability to estimate different parameters for the stock, industry, and overall market.

    By Guy Avtalyon

    We are going to show you how a beginner investment portfolio should look like. Of course, if you think the stock market is getting crazy, you couldn’t be more right. DJIA is going up, going down, S&P 500 Index also. The graphs are looking like ECG of some very vulnerable hearts. Maybe you don’t believe it, but this is the right time to enter the stock market. A stock market is truly a wealth-building tool. Moreover, entering the stock market is easier than ever. But, as you are new in this field, you would like to know what to buy or, in other words, how a beginner investment portfolio should look like.

    There are so many ways to invest the money and can pick the level of risk you’re willing to take. So, it is obvious the first thing you have to decide – the level of risk you can tolerate.

    High-risk investments mean greater chances for high rewards. Wait, that also means bigger chances for losses. As a beginner investor, you should avoid high-risk investments if you don’t want your capital to throw through the window. Later, when you become more experienced and earn more cash, you’ll understand how to handle the risk, for now, here are some tips of how a beginner investment portfolio should look like

    We know that a lot of beginners think of investing as attempting to get a short-term gain in the stock market. But if you want to build wealth, you have to think about long-term investing. 

    Beginner investment portfolio in 2020

    ETFs

    The world of the stock market and investing can be confused for beginners. There are individual stocks, mutual funds, bonds, mutual funds, etc.

    Our first suggestion for you is some low-cost ETF. But there is a question: is it worth it? You’ll need time to build an individual stock portfolio.

    Exchange-traded funds (ETFs) can be an excellent investment way for small investors. You can trade these funds like stocks. They can give you to expand the diversity of your portfolio and to do that without spending too much time on it. 

    Here is how an ETF works. A fund provider holds the underlying assets. Such creates a fund to follow the performance of underlying assets. At some point, such a provider decides to sell shares in that fund to other investors. As a shareholder, you’ll own a part of an ETF, but you will not own the underlying assets in the fund. 

    ETF tracks a stock index. So, as a shareholder of the ETF, you’ll get dividends, which you can reinvest, for the stocks included to the index.

    ETFs are a passive approach to investing. Brokers will not charge you trading costs for ETFs. It is zero. Just make an automatic investment each week or month, it’s up to you.

    Include the gold

    Due to the coronavirus pandemic, the global economy is suffering. In the first quarter, only five main asset classes posted gains. Among them, apart from the US dollar and yen which are currencies, the list includes gold. Gold always was a great way to protect the portfolio and historically it was known as a safe-haven investment. It is the same nowadays. You can add some gold into your portfolio while you are waiting to come into stocks because today they can be too volatile for beginner investors. So, you should grow the exposure to gold. Gold works great when the dollar is flat-to-down. Also, gold can be a great hedge against inflation.

    Moreover, it performs best when investors are worried about low growth on other assets. Basically, if we take a look at its historical performances, we’ll notice that gold played best and rose fastest when other economic measures were falling quickly. We have such a situation today.

    We have negative interest rates, bond yields are almost zero, so gold could be a very good opportunity to hold it. Add it as very good protection to your portfolios.

    A beginner investment portfolio should include mutual funds

    Mutual funds are still amazingly popular. Especially target-date mutual funds in retirement plans, so add them in your beginner investment portfolio. Mutual funds are basically a basket of investments. When you buy a share in some mutual fund you are actually investing in all holdings included to the fund with just one step. 

    A target-date mutual fund usually is a mix of stocks and bonds. 

    How to invest in target-date mutual funds? 

    For example, you plan to retire in 20 years and everything you have to do is to pick the fund with 2045 in the name. But you have to know, so don’t be surprised, the fund you choose will hold stocks essentially. How is that possible? Your retirement is far away, and stocks have higher returns in the long run, higher than any other asset. As time goes by, the fund manager will shift part of your investment toward bonds because they are less risky. You wouldn’t like to take too much risk while you are approaching the date of your retirement.

    Add Index funds to the beginner investment portfolio

    If you don’t want to employ a manager to create and manage your beginner investment portfolio, index funds are a good choice for you since they track a market index. What is the market index? It is a collection of different investments that represent a part of the market. For example the S&P 500 Index. It is a market index that covers the stocks of about 500 biggest companies in the US. So, an S&P 500 index fund will reflect the performance of the S&P 500, by purchasing the stocks in that index.

    Index funds represent another passive approach to invest just like ETFs. They carry lower fees charged based on the sum you have invested. The advantage of these funds is that some brokerages offer a range of index funds without an established minimum. So you can start investing in some index fund at $100 or less.

    Help to create the portfolio

    For example a robo-advisor. Let’s assume you would like to invest but you’re not the DIY type. Well, we have some good news for you. You have a lot of robo-advisors out there. They will handle your investment by using very complex algorithms. But don’t be worried. It will cost you less than a human advisor, usually, it will be from 0.25% to 0.50% of your account per year. Also, robo-advisers will let you open an account without the minimum required.

    Robo-advisors are an excellent way for beginners to get started investing. Look, you are a beginner and you don’t have good knowledge about investing yet. So, robo-advisors will do all that hard work for you and you’ll need a little money for them. All you have to do is to check your portfolio from time to time. So to say, it’s your money invested. Also, they will give you a chance to learn more about investing since they’ll provide you tools and educational material.

    Investment apps are also extremely helpful. You can easily find some aimed at beginners.

    Traders-Paradise recommends

    For example, M1 Finance is excellent if you want to build a free portfolio for long-term investments. This app offers commission-free investing, automated deposit, buying fractional shares, and has many other features like free maintenance of a portfolio, diversified portfolio, etc.

    Fidelity is another great app that offers full service at zero trade prices. It allows you to invest for free, a variety of ETFs that it offers can help you to build a well-balanced portfolio, stocks, or options trades and all for free.

    TD Ameritrade offers free options trading. If you want to become a trader rather than an investor, it’s a really good pick for you. We already wrote about this app but we would like to point again how excellent it is. For example, its platform “Thinkorswim” is one of the best. It will not charge you a commission for trading stocks, options or ETFs.

    After deeper investigation, you might choose to invest in the companies that offer the chance for growth. Just keep in mind, your portfolio has to be diversified. Never expect that each stock can generate great returns. That is the reason for diversification. It appears especially when we are talking about a beginner investment portfolio. But that doesn’t mean you’ll need a large collection of investments. You’ll need just a few stocks but they have to run together in your favor.

    Today’s volatile stock market offers discounts on great stocks. So, this is a great time to start investing and create your beginner investment portfolio that will generate you amazing gains in the future. 

  • What Is Alpha In Investing – How to Beat the Market

    What Is Alpha In Investing – How to Beat the Market

    What Is Alpha In Investing
    Alpha represents a measure of an asset’s return on investment compared to the risk-adjusted expected return.
    Beta represents a measure of volatility. Beta measures how an asset moves versus a benchmark.

    What is Alpha? Alpha is a measure of the performance of an investment in comparison to a fitting market index, for example, the S&P 500. The base value is zero. And when you see the number one in Alpha that means that the return on the investment outperformed the overall market average by 1%. A negative alpha number shows that the return on the investment is underperforming in comparison to the market average. This measure is applicable over a strictly defined time frame.

    What is Alpha more? It is one of the performance ratios that investors use to evaluate both individual stocks and portfolio as a whole. Alpha is shown as a single number, for example, 1, 2, 5 but expressed as a percentage. It shows us how an investment performed related to a benchmark index. For example, a positive alpha of 4 (+4) suggests that the portfolio’s return outperformed the benchmark index’s performance by 4%.  But the alpha of negative 4 (-4) means that the portfolio underperformed the index by 4%. When alpha is zero that means that your investment had a return that met the overall market return.

    What is Alpha of a portfolio?

    It is the excess return the portfolio yields related to the index. When you are investing in some ETF or mutual funds you should look if they have high alpha because you will have better ROI (Return on Investment).

    But you cannot use this ratio solely, you have to use it together with a beta. Beta is a measure of investment volatility. The beta will show you how volatile one investment is compared to the volatility of, for example, the S&P 500 index.

    These two ratios are used to analyze a portfolio of investments and assess their theoretical performance.

    How to calculate?

    First, you have to calculate the expected rate of return of your portfolio. But you have to do that based on the risk-free rate of return, market risk premium, and a beta of the portfolio. The final step is to deduct this result from the actual rate of return of your portfolio.

    Here is the formula

    Expected rate of return = Risk-free rate of return – β x (Market return – Risk-free rate of return)

     and

    Alpha of the portfolio = Actual rate of return of the portfolio – Expected Rate of Return on Portfolio

    The risk-free rate can be discovered from the average annual return of security, over a longer period of time.

    You will find the market return by tracking the average annual return of a benchmark index, for example, S&P500. The market risk premium is calculated by deducting the risk-free rate of return from the market return.

    Market risk premium = Market return – Risk rate of return

    The next step is to find a beta of a portfolio. It is determined by estimating the movement of the portfolio in comparison to the benchmark index. 

    So, now when we have this result, expected rate of return, we can calculate further. We have to find the actual rate of return. It is calculated based on its current value and the prior value.

    And here we are, we have the formula for calculation of alpha of the portfolio. All we have to do is to deduct the expected rate of return of the portfolio from the actual rate of return of the portfolio.

    That was a step by step guide for this calculation.

    Becoming an Alpha investor

    There is a great discussion about should the average investor look for alpha results of a portfolio. But we can hear that investors mention alpha. This is nothing more than the amount by which they have beaten or underperformed the benchmark index. It can be the S&P 500 index if you are investing in the US stock market. In such a case, that would be your benchmark.

    For example, if the benchmark index is up 4% over the period, and your portfolio is up 6%, your alpha is +2. But if your portfolio is up 2%, your alpha is -2.

    Of course, everyone would like to beat the benchmark index all the time. 

    What is the Alpha investing strategy?

    We know that Alpha is a measure of returns after the risk is estimated. Risk is determined as beta, a measure of how volatile one investment is related to the volatility of the benchmark index.

    Alpha strategies cover equity funds with stock selection. Also, hedge fund strategies are a popular addition in alpha portfolios.

    Something called “pure alpha” covers hedge funds and risk premia strategies. The point is that by adding an alpha strategy to your overall portfolio you can boost returns of the other investment strategies that are not in correlation.

    Alpha is the active return on investment, measures the performance of an investment against a market index. The investment alpha is the excess return of investment relative to the return of an index.

    You can generate alpha if you diversify your portfolio in a way to eliminate disorganized risks. By adding and subtracting you are managing the risk and the risk becomes organized not spontaneously. When alpha is zero that means the portfolio is in line with an index. That indicates that you didn’t add or lose any value in your portfolio.

    When an investor wants to pick a potential investment, she or he considers beta. But also the fund manager’s capacity to generate alpha. For example, a fund has a beta of 1 which means it is volatile as much as the S&P index. To generate alpha, a fund manager has to generate a return greater than the S&P 500 index.

    For example, a fund returns 12% per year. That fund has a beta of 1. If we know that the S&P 500 index returns 10%, it is said the fund manager generated alpha returns.

    If we consider the risks, we’ll see the fund and the S&P index have the same risk. So, the fund manager generated better returns, so such managers generated alpha. 

    Alpha in use

    You can use alpha to outperform the market by taking more risks but after the risk is considered. Well, you know that risk and reward are in tight relation. If you take more risks, the potential reward will go up. Hence, limited risks, limited rewards.

    For example, hedge funds use the concept of alpha. They use beta too, but we will write later about the beta. The nature of hedge funds is to seek to generate returns despite what the market does. Some hedge funds can be hedged completely by investing 50% in long positions and 50% in short positions. The managers will increase the value of long positions and decrease the value of their short positions to generate positive returns. But such a manager should be a ninja to provide gains not from high risk but from smart investment selection. If you find a manager that can give you at least a 4% annual return without a correlation to the market, you can even borrow the money and invest. But it is so rare.

    Alpha Described

    What is alpha more? It is often called the Jensen index. It is related to the capital asset pricing model which is used to estimate the required return of an investment. Also, it is used to estimate realized achievement for a diversified portfolio. Alpha serves to discover how much the achieved return of the portfolio differs from the required return.

    Alpha will show you how good the performance of your investment is in comparison to return that has to be earned for the risk you took. To put this simply, was your performance adequate to the risk you took to get a return.

    A positive alpha means that you performed better than was expected based on the risk. A negative alpha indicates that you performed worse than the required return of the portfolio. 

    The Jensen index allows comparing your performances as a portfolio manager or relative to the market itself. When using alpha, it’s important to compare funds inside the same asset class. Comparing funds from one asset class, otherwise, it is meaningless. How can you compare frogs and apples?

    What is beta?

    When stock fluctuates more than the market has a beta greater than 1.0. If stock runs less than the market, the beta is less than 1.0. High-beta stocks are riskier but give higher potential returns. Vice versa, stocks with lower beta carries less risk but yield lower returns.

    Beta is usually used as a risk-reward measure. It helps you determine how much risk you are willing to take to reach the return for taking on that risk. 

    To calculate the beta of security, you have to know the covariance between the return of the security and the return of the market. Also, you will need to know the variance of the market returns. The formula to calculate beta is

    Beta = Covariance/Variance

    ​Covariance shows how two stocks move together. If it is positive that means the stocks are moving together in both cases, when their prices go up or down. But if it is negative, that means the stocks move opposite to each other. You would use it to measure the similarity in price moves of two different stocks.

    Variance indicates how far a stock moves relative to its average. You would use variance to measure the volatility of stock’s price over time.  

    The formula for calculating beta is as shown above.

    Beta is very useful and simple to describe quantitative measure since it uses regression analysis to gauge the volatility. There are many ways in which beta can be read. For example, the stock has a beta of 1.8 which means that for every 1% correction in the market return there will be a 1.8% shift in return of that stock. But we also can say that this stock is 80% riskier than the market as a whole. 

    Limitations of Alpha

    Alpha has limitations that investors should count when using it. One is related to different types of funds. If you try to use this ratio to analyze portfolios that invest in different asset classes, it can produce incorrect results. The different essence of the various funds will change the results of the measure. Alpha is the most suitable if you use it strictly for stock market investments. Also,  you can use it as a fund matching tool or evaluating comparable funds. For example, two large-cap growth funds. You cannot compare a mid-cap value fund with a large-cap growth fund.

    The other important point is to choose a benchmark index. 

    Since the alpha is calculated and compared to a benchmark that is thought suitable for the portfolio, you should choose a proper benchmark. The most used is the S&P 500 stock index. But, you might need some other if you have an investment portfolio of sector funds, for example. if you want to evaluate a portfolio of stocks invested in the tech sector, a more relevant index benchmark would be the Dow technology index. But what if there is no relevant benchmark index? Well, if you are an analyst you have to use algorithms to mimic an index for this purpose.

    Limitations of beta

    The beta is good only for frequently traded stocks. Beta shows the volatility of an asset compared to the market. But it doesn’t have to be a rule.  Some assets can be risky in nature without correlation with market returns. You see, beta can be zero. You should be cautious when using a beta.

    Also, beta cannot give you a full view of the company’s risk outlook. For short-term volatility it is helpful but when it comes to estimating long-term volatility it isn’t.

    Bottom line

    What is alpha? It began with the intro of weighted index funds. Primarily, investors started to demand portfolio managers to produce returns that beat returns by investing in a passive index fund. Alpha is designed as a metric to compare active investments with index investing. 

    What is the difference between alpha and beta?

    You can use both ratios to compare and predict returns. Alpha and beta both use benchmark indexes to compare toward distinct securities or portfolios.

    Alpha is risk-adjusted. It is a measure that shows how funds perform compared to the overall market average return. The loss or profit produced relative to the benchmark describes the alpha. 

    On the other hand, beta measures the relative volatility of assets compared to the average volatility of the entire market. Volatility is an important part of the risk. The baseline figure for beta is 1. A security with a beta of 1 means that it performs almost the same level of volatility as the related index. If the beta is under 1, the stock price is less volatile than the market average. And vice versa, if the beta is over 1, the stock price is more volatile. There is some tricky part with beta value. If it is negative, it doesn’t necessarily mean less volatility. 

    A negative beta means that the stock tends to move inversely to the direction of the overall market.

  • Mutual funds are an opportunity to make wealth

    Mutual funds are an opportunity to make wealth

    3 min read

    Mutual funds are an opportunity to make wealth 1

    What are the benefits of mutual funds? How much do they cost? Which funds are right for you? What should you consider before investing?

    These are just a few of the questions we’ll answer here.

    Mutual funds are not bank deposits and are not guaranteed by any government agency.

    They involve risks, including the potential loss of some or all of your investment. Past performance is not a solid sign of future performance.

    However, it can help you evaluate a fund’s volatility and how it operates in various market circumstances.

    WHY INVEST IN MUTUAL FUNDS?

    Mutual funds are an opportunity to make wealth

    Advantages

    As an example, more than 100 million Americans use mutual funds to invest in their long-term goals. Here are some of the benefits they offer:

    Professional management

    When you invest in a mutual fund, your money is managed by full-time professionals. They research and select investments that are appropriate for the goals of each fund, and monitor the fund’s performance so they can change the portfolio when needed.

    Diversification

    Buying shares in a mutual fund make it comfortable for you to spread your investment over many different companies and industries. This may help to protect your assets over market volatility. Nevertheless, diversification doesn’t ensure a profit or defend against a loss.

    Choice

    Mutual funds give you a wide variety of choices to help meet your financial goals. You can invest for different objectives, at different levels of risk and in different kinds of securities.

    Affordability

    Mutual funds allow you to invest with a nearly small amount of money. Without a fund, it would usually demand a much considerable investment to build such a diversified portfolio.

    Liquidity

    You can ordinarily sell your shares at any moment and for any cause. Anyway, there may be exceptional moments when fund purchases are limited because of some extreme market requirements.

    Automatic Reinvestment

    Mutual funds give you the choice of reinvesting your yields and capital gains in new shares of the fund, without being indebted a sales charge.

    A mutual fund is when a group of investors gives money to managers to invest in diversified securities. It can be stocks and bonds, for example. Because it’s group, every part-owner as the investor is, profits and loses an equivalent piece. The costs of the mutual fund are divided according to the cost proportion. And, because the funds are diversified among stocks or bonds and other securities, they are regularly lower risk than individual stocks or bonds.

    To some investors, choosing individual securities to invest in and guide can be a risky task.

    Access mutual funds. With benefits like added assurance and lower risk, mutual funds are one of the best investment opportunities to enter the market. But before you take your place into the group funds, you need to know the tricks.

    Mutual funds are under the control of money managers.

    What is Mutual Fund Investment? 5

    They create portfolios for investment with a pool of money. Often, they have different kinds of investment goals. Some managers, like fixed-income managers, focus on generating low-risk, high pay-off investments for their funds, while long-term growth managers try to beat the Nasdaq or S&P 500 during the fiscal year.

    Shares in a mutual fund are typically bought at the fund’s current net asset value (NAV, or sometimes NAVPS) per share. This figure is determined by dividing the total value of all the securities in the fund by the number of outstanding shares.

    Mutual funds are actually investments like buying stock in companies.

    Investors purchase shares into the mutual fund. That, in turn, provides them a right to the fund’s assets. Hence, the value of the mutual fund represents the value of its portfolio.

    Let’s say you invest in a mutual fund. Well, not you but a manager will invest the public funds added to the fund. A manager will invest them in several securities, for example in stocks and bonds.

    The manager is ordinarily selected by a board of directors and is frequently an owner of the part in the fund.

    Such a fund manager will pick analysts to help in making investment decisions. Majority of funds will engage some accountant who’s task is to measure the net asset value of the fund every day. That will define the price of the share in the fund.

    Most mutual funds also have compliance officers who keep up-to-date on regulations.

    When investors purchase into a mutual fund, their money is managed by the fund manager. Such professionalist invests that money in different assets with specific intentions for risk and returns in judgment: like long-term increase or fixed-profit.

    Some funds may be more dangerous than others, that’s true. But usually, the composition of a mutual fund manages risks well-known low.

    Mutual funds only trade once daily and are often part of a 401(k) or an individual retirement account, IRA.

    The biggest benefit of mutual funds is, they are handled by someone other than the individual investor. You just have to put the hard decisions in an expert’s hands. The fund manager is more prepared for reasonably allocating our funds than we could do it by ourselves.

    The mutual funds regularly submit several portfolios with a group supply of money. So the personal risk to all investors is lessened. So we can say that mutual funds are honestly low-risk and high-reward.

    But, mutual funds include some fees in the kind of annual fees and stockholder fees.

    Annual running fees usually are 1%-3% of the annual funds under control. The stockholder fees are in line with the commissions paid by when buy or sell funds.

    Besides that, an obvious lack of mutual funds is that you don’t have constant control of stocks you’re investing in. Hence, for some traders, this may produce some difficulty, particularly if your fund begins dropping.

    Don’t waste your money!

    risk disclosure

  • Alternative Investments Role in Diversified Investment

    Alternative Investments Role in Diversified Investment

    What is The Role of Alternative Investments in Diversified Investment
    Investors should pay attention to several issues when adding alternatives to their investment strategy.

    By Guy Avtalyon

    Alternative investments, which have been used by large institutions and foundations for quite some time, have become more mainstream in the last years. They are more popular among individual investors. Also, there are more available products, which makes investing in alternatives possible for an increasing number of investors.

    Alternative investments are a non-traditional approach to investing. They give the ability to invest in sectors and access to assets that traditional investments cannot provide. Investors should understand alternative investments as the potential to improve the overall risk-return ratio of your portfolio. Even a small allocation to alternatives may be reasonable and profitable now for more investors. Previously it wasn’t the case.

    However, the non-traditional approach and structure of these investments bring with them unique risks of which investors must be aware of.

    Alternative investments have a different approach

    Alternative investments use a different approach to investing than do traditional equity or fixed-income investments.
    This approach may require holding both long and short positions in securities. Also, it may require to hold private securities instead of publicly-traded investments. And there may be derivatives or hedging strategies as well. Also, investors that use alternatives have a goal to achieve a distinct level of total return. The other investors’ goal is the opposite, they usually pay more attention to relative performance versus an index.
    Alternative investments have the potential to magnify the risk but also returns of an investment portfolio. They can possibly improve diversification and reduce risk. This approach is more flexible, investors have a chance to invest in a more extensive set of investments, so the possibility of enhancing returns is obvious.

    Different risk

    Alternative investments have risks different from traditional investments. They are less liquid, especially in periods of high pressure in the markets. Also, they are more complex and less transparent. These characteristics make it difficult for inexperienced investors to understand and they are more subject to investment manager failure.

    The successful implementation of an alternative investment strategy relies largely on the investment manager’s experience and skill because of the wide range of investment opportunities.

    Satellite asset classes as Alternative Investments

    Satelite asset classes are very suitable for portfolio diversification. They cover everything that traditional investors and funds managers don’t even think about. They are more interested and specialized in asset classes such as real estate, commodities, any that can give high-yield fixed income. Satellites are non-traditional and have a low correlation with traditional assets. But their performances are driven by exposure which represents the similarity with traditional investments.

    Types of Alternative Investments

    We highlight several types of alternative investments but this list is more illustrative than exhaustive because new approaches are constantly being developed.

    Private equity

    Private equity is an investment strategy. Its goal is to take part in the growth of the private company. Hence, this strategy is long-term investments all in private securities generally and globally.
    Private equity investment strategy covers illiquid asset classes with potentially greater long-term capital appreciation. The diversification doesn’t include public markets.
    Only to higher-net-worth individuals use this strategy because it requires more investment experience, hence they are often accredited investor at high minimums and often has liquidity restrictions.

    Hedge funds

    The hedge funds are an alternative investment. They are designed to protect investment portfolios from market changes, so they will generate positive returns no matter if the markets are up or down.
    They could protect the investment from market risk by adding alternative investments to the portfolios to decrease loss and protect capital.
    The term “absolute return” is broadly used in connection with hedge funds. This explains how investment strategies are created to generate returns in any market condition. Actually, these funds are “hedging” the markets.

    Managed Futures

    An investment strategy that seeks to participate in trends in a large variety of global futures markets. Strategies include the use of the stock index, interest rate, currency, energy, and commodity futures. Many managed futures traders apply sophisticated software designed to invest in a disciplined, unemotional fashion, which often results in a lower correlation with traditional assets.

    Alternative investments – mutual funds

    These funds are not forced by traditional portfolio management systems. They have varying approaches, ranging from the absolute return, long/short equity, a broad mandate, or “go-anywhere” funds, and hedge fund-like strategies. Many of these funds also have a total return or an absolute return objective. They provide access to non-traditional investment. But they also provide investors daily liquidity at fair investment minimum.
    Alternative investments can be useful tools to improve the risk-return of an investment portfolio. They can increase diversification and reduce volatility, given low correlations to more traditional investments.

    Risks of Alternative Investments

    • Higher fees.  – Alternative investments can have higher fees. They may also charge additional management fees. While higher than traditional investments, these fees may or may not be excused when comparing returns net of fees.
    • More complicated.  – Alternative managers invest in a broad variety of investments, such as derivatives, and can use short selling. Understanding that can be difficult for many investors.
    • Less transparent.  – There can be limited to the underlying holdings of these investments. They use many tools that are not always the best choice for alternative investments. That makes a manager’s investment ability more difficult to assess. Also, some alternative investments are largely unregulated.
    • Less liquid. – This is due to holding illiquid investments that can restrict the investor’s ability to offset money invested. For example, some hedge funds do not allow redemptions over the first year of investing. Most of them will allow annual or quarterly redemptions. Moreover, private equity may not allow redemptions for more than seven years. Here is also exposure to a notable lack of liquidity in some trading environments.
    • Less tax-friendly. – Most alternative investment strategies aren’t focused on minimizing taxes.
    • May disappoint in strong up markets. – They use short sellings to generate absolute returns. That may deter some investors.
    • May not diversify risk in extreme down markets. – During the dislocation, the relationships of many different types of investments may increase notably. Investors hold that the more profits of alternatives is connected to the added risk.

    Is this suitable for every investor?

    Alternative investments can potentially magnify the overall risk-return of an investment portfolio. There are benefits but also risks in these non-traditional investment strategies. The most important is that investors have to be comfortable with alternatives when adding them to their investment strategy.
    It is important also to discuss alternative investments with a respectable financial advisor. If you choose this strategy you’ll first need to determine how suitable it is in relation to your current investment approach.