Alternative investments have become increasingly popular over the past couple of years and much like the rumor mill in school, it’s led to the spread of misconceptions.
Let’s look deeper at 5 common myths about alternative investments and why they aren’t necessarily true.
1. Alternative investments are riskier than traditional investments
Risk is present in all types of investments. Some financial investments are riskier than others, but you will always encounter some level of risk with investing.
The truth is that there are so many different types of alternative investments that it’s impossible to pool them into the same risk category. Alternative investments range from private equity funds to real estate to collectibles like baseball cards. Essentially, anything that’s not a traditional stock or bond can be considered an alternative investment.
How you set up your portfolio and alternative investment strategy is directly tied to the level of risk you encounter. If your portfolio consists of only alternatives, it will typically have a higher risk profile because of its lower liquidity and higher targeted returns.
In general, since alternative investments are such a limited part of the market, the impact of market volatility is typically lower.
2. Alternative investments are all the same
There are thousands of different types of alternative investments! They come in different shapes, sizes, and well, colors. Some of the most common alternative investments are:
Private equity funds
Real estate commodities
Investing in alternatives is a great way to invest in your passions. For example, if you love working on home improvement projects in your free time, you may enjoy flipping and renovating houses in your neighborhood and surrounding areas.
Or perhaps you inherited some antique jewelry or old comic books from a family member and are interested in diving into the world of collectibles.
Whatever fuels your interest, you can utilize alternative investments to further explore and capitalize on those things. Because the world of alternatives is so vast, there is something for everyone to enjoy.
3. Alternative investments are only for the ultra-wealthy
This statement probably proved to be true a decade ago, but today, there’s a wide variety of opportunities in the world of alternative investments. Some are only for the ultra-wealthy, top .5% of the population, but many are more widely available.
Alternatives were known for having exorbitantly high minimums and investment fees that priced the everyday investor out of the market, but that’s now changed.
Let’s take crowdfunding, for example. Today, investors can buy one or multiple shares of an asset instead of investing millions of dollars upfront. So because of alternatives like crowdfunding, investors have greater access to profitable investments and a more diversified portfolio
Our mission at Hedgehog is to further lower the barrier for entry so that the everyday person can reap the rewards of alternatives.
4. Alternative investments are too complicated and not transparent enough
The truth is that everything is complicated if you don’t take the time to understand and study it. And if you think of alternative investments under one umbrella, it can be quite complex because each investment can be so vastly different.
That’s why it’s so important to do your research and due diligence before deciding on an alternative investment (or any investment for that matter). You will need clarity on the potential rate of return and how long your assets will be tied up for. Moreover, you should ask important questions like:
How many similar investments has the investment group done in the past?
How does the investment work?
How is the money used?
What’s the background of the investment group?
What is the expected timeline?
What are the risks involved?
The more questions you ask, the more confident you will feel investing.
5. Alternative investments can't provide returns that are as good as the market
Just because alternative investments don’t follow the swings of the stock market, doesn’t mean that the returns are subpar. In fact, it’s usually in the investor's favor that alternatives don’t follow the drastic ups and downs of the stock market.
Alternative investments can see quite high returns. With Hedgehog, for example, our investors received an average of 19% in returns in 2022.
The rate of return depends on the specific investment, but alternatives see equally as good (or better) returns as the stock market.
Diversify your portfolio with Hedgehog Investments
Alternative investments can be an excellent addition to your portfolio, but the most important thing is that you choose the right one for you based on your goals and risk tolerance. Take a closer look at our model and see if it’s the right investment choice for you. If you want to see how it all works up close, get in touch with our team.