Alternative investment opportunities

alternative investment opportunities

Saving and investing money are important steps in securing your financial future. Investing in stocks and bonds is a traditional way to grow wealth. But an investment strategy diversification is a good way to reduce risks.

This is where alternative investment opportunities come into play. They are another way to expand your portfolio alongside traditional investments. Alternative investments include a range of asset classes such as luxury goods, real estate, special asset classes (art, wine, rare coins). These investments can potentially offer higher returns than equities and bonds, but also carry higher risks.

In this blog post, we take a closer look at alternative investment options. We will look at the different asset classes, their pros and cons, and give examples of investment vehicles.

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What are alternative investments?

Simply put, alternative investments are all asset classes, which are excluded shares and bonds. These offer investors the opportunity to diversify their portfolio and potentially earn higher returns, but also carry higher risks.

Alternative investments include:

Products: Precious metals, agricultural products (e.g. wheat, maize) and energy (e.g. oil, gas). The prices of these products can be volatile and depend on a number of factors, such as supply and demand, the global economy and political stability.

Real estate: Rental security through investment funds or direct investment in real estate. Real estate investments can provide stable rental income and long-term capital growth. However, these investments are less liquid and usually require more capital.

Specific asset classes: Wine, art, rare coins, and antiques. These investments can be attractive to collectors and investors looking for unique investment opportunities. However, it is important to bear in mind the speculative nature of these investments and the high risk involved.

It is important to take into account your investment objectives, risk tolerance and investment horizon when choosing between different alternative investments. Markets should be thoroughly researched and analysed before making investment decisions.

In the Estonian context alternative investment opportunities are still in their infancy. However, some platforms offer investment opportunities in product, real estate and special asset classes.

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Pros of alternative investments

  • Diversification

Alternative investments help you diversify your portfolio and reduce the risks associated with traditional asset classes. For example, when the stock market is down, products can perform well.

  • Potentially higher returns

Some alternative investments, such as venture capital, can offer higher returns than stocks and bonds.

  • Hedging against inflation

Some asset classes, such as real estate and precious metals, can help protect your investments against inflation.

  • Unique investment opportunities

Special asset classes offer investors the opportunity to invest in unique and potentially valuable assets.

Disadvantages of alternative investments

  • Higher risks

Alternative investments usually carry higher risks than stocks and bonds. These asset classes can be more volatile and less liquid.

  • Higher fees

Alternative investments often have higher returns than traditional investments.

  • Lack of information and subjectivity

Valuation of investments can be more difficult because less information is available. Also, the value of some specific asset classes, such as art, is relatively subjective.

  • Less liquid

Selling alternative investments can be more complicated and time-consuming than selling shares and bonds.

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Examples of alternative investments

Products

 

Gold

Gold is a traditional asset used to protect against inflation. For example, the price of gold has almost tripled in the last 20 years. However, the price of gold is volatile and can fall in the short term.

Nafta

Oil prices are often linked to economic growth. When the economy is growing, demand for oil is usually high, which pushes up the price. Conversely, during a recession, the price of oil can fall sharply.

Risks: Product prices are volatile and depend on a number of factors, such as supply and demand, the global economy and the political situation.

Production: These products have historically yielded lower returns than equities and bonds, but they also carry less risk.

Example: By investing in an oil futures fund, you have the opportunity to participate in the rise in oil prices.

Real estate

Real estate funds

Offer investors the opportunity to invest in real estate without directly buying the property. These funds invest in a wide range of real estate, such as residential, commercial and industrial buildings.

Direct investment

Direct investment in real estate involves buying an apartment, house or commercial building. This type of investment offers potentially higher returns, but also requires more capital and experience.

Risks: Real estate investments are less liquid than stocks and bonds. The value of real estate can fall during an economic downturn.

Production: Returns on real estate investments have historically been higher than on equities and bonds.

Example: An investment in a real estate fund investing in residential property in the Baltic States.

Specific asset classes

Art

Art investments can offer potentially high returns, but they are also very risky. The value of art is subjective and can be difficult to assess.

Vein

Rare and old wine is a popular choice for investment. The value of wine increases over time, but this investment requires knowledge and experience.

Rare coins

The value of rare coins is usually related to their metal content and numismatic value.

Risks: Specific asset classes are speculative and carry high risks. Valuing these investments is complex and requires knowledge and experience.

Production: The performance of specific asset classes has historically varied widely.

Example: Investment in a rare wine fund investing in Bordeaux wines.

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Illustrative examples

Chanel handbags

The price of the Chanel Flap Bag today is as follows 10 times higher, than in the 90s. Between 2020 and 2022, its price rose to 50%, and has continued to rise. Its price has risen more than shares

    Gold

    in 2002 began John Paulson invest heavily in gold, anticipating a rise in gold prices. His bet paid off when the world was hit by the financial crisis in 2008, prompting a return to safe assets such as gold. By 2011, gold prices had more than doubled and Paulson's firm, Paulson & Co., reportedly earned more than $10 billion from his gold investments. However, just a few years later, the price of gold fell sharply, wiping out the value of his assets.

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    Alternative investments can be exciting and profitable, but they also come with higher risks. These asset classes can be more volatile, less liquid and require more knowledge and experience from the investor.

    Before investing in alternative investments, it is important to:

    • Define your investment objectives and risk tolerance.
    • Thoroughly investigate the asset class chosen and the risks involved.
    • Gain sufficient knowledge and experience or use the help of a professional financial adviser.
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