Alternative investments can bring some safety into your portfolio, but choose carefully.
There are plenty of ways to play it safe in life. If you never go out to the movies, you eliminate the risk of spending a small fortune on a lackluster plot, dismal acting, and popcorn that’s way too salty. If you don’t take a road trip, there is little risk that you will get stuck in a construction zone for miles and miles.
Of course, that means you might miss out on a groundbreaking work of cinema or the best little roadside ice cream shop. You can, however, make “alternative investments” of time and take some limited risk by renting the same movie at home or popping by your neighborhood ice cream shop. You may not get the big screen experience or the excitement of a wild blueberry and honey cone, but you will get some predictability and your popcorn might be way better than anything you can get at the theater. Plus no one will be talking on their cell phone.
In the stock market, there are also alternative investments that can bring a level of safety and stability to your portfolio. Some are, in fact, quite good.
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Find out what alternative investments are and learn where to find the right ones for your portfolio
So what are alternative investments? Pretty much anything outside of your typical stocks, bonds, and cash count as alternative investments. But alternative investments aren’t synonymous with safety. Cryptocurrencies are notoriously volatile, for instance.
If you choose carefully, however, and bear in mind your goals as an investor, you could find that some alternative investments are good fits for your portfolio. Here are five we like.
- REITs. REITs are special purpose entities, with special tax status, that own real estate and pass along most of the income from that real estate to shareholders. REITs can own any type of real estate, but most specialize in one type, like apartment buildings, malls, medical office buildings or self-storage facilities.
- Master Limited Partnerships (MLPs). Master limited partnerships are a unique type of business allowed under the U.S. tax code. In addition to a limited partner or partners (aka investors), who provide the MLP with capital and get a share of its cash flow in return, MLPs also have a general partner that runs the business. MLPs are easy to buy and sell, and they trade on major exchanges just like regular stocks. MLPs derive about 90% of their revenue from natural resources, commodities or real estate. In practice, many own energy transportation or processing facilities, like oil or gas pipelines.
- Commodities. Commodities encompass a range of categories, most of which are items we use on a regular basis. Think agriculture and livestock, heating oil, or industrial metals like copper. Commodities can be volatile, but some, like gold, can also act as a hedge against economic uncertainty.
- Utilities. Utilities have long been considered “widow and orphan stocks” for their slow, steady returns and low volatility, and can do well when the rest of the stock market is doing poorly. While they’re never going to grow fast enough to be hot stocks, utility companies usually operate legal monopolies in their market area, and don’t have to worry about losing customers. Long term, utilities usually manage to achieve annual earnings and revenue growth in the mid-single-digit range.
- Marijuana. Marijuana is a burgeoning industry and along with it, marijuana investing. Not only is marijuana becoming more culturally accepted; it is also becoming increasingly legal across North America. And as the popularity of marijuana use increases, so does its investment potential. The trouble is, these alternative investments are notoriously volatile. Many are small. Many are thinly traded. Many are still losing money. And many lack the support of institutional investors. The best strategy for investing in marijuana is to invest in the companies that are predicted to be the industry leaders of the future. These are the companies that do possess the capacity to produce a variety of different marijuana products and that have the ability to expand their markets across countries, not just states or regions.
The smart way to add alternative investments to your portfolio
Like any investing, when you invest in alternative investments, you can’t ignore the benefits of having a plan.
One suggestion is to get familiar with charts and take five minutes to look at some of the major indexes every day or two. On the chart, you want to plot the index itself (say, the S&P 500), and you also want to plot its 50-day moving average. If most indexes are above their 50-day line, you should be constructive toward stocks. If most are below, you should be defensive. It sounds simple … and it is.
Or to quote the famous Warren Buffett, follow two simple rules: Rule #1: Don’t lose money. Rule #2: Don’t forget rule #1.
What is your experience with alternative investments? Do you like them better than typical stocks? Share your thoughts in the comments.
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