Alternative investment is an investment in a product other than traditional investments such as stocks, bonds or cash. Most analysts believe that alternative investments should be considered when the market is volatile. Although it is impossible to resign completely from financial products which ensure liquidity, adding alternative assets to an investment portfolio in order to achieve a higher level of diversification is a good strategy.
The characteristic features of alternative investments are:
- little correlation with traditional financial tools such as stocks and bonds
- are relatively liquid
- the current market value is difficult to determine
- the historical data regarding risk and rate of return is limited
- the trends on alternative investments are difficult to analyze
- investment requires an in-depth analysis which often has to be arranged by an investor
- the costs of purchasing and selling may be high
There are two reasons to invest in alternative assets. The first is an expected high rate of return which means that an asset is purchased in order to be sold in the future at a much higher price.
The second is an investor’s genuine interest in an asset as a collectible item. It is a so-called passion investment where the rate of return is not the most important factor in the decision making process.
Passion investments usually concern:
- art objects
- wine
- cars
- coins
- jewellery, gems and watches
- antiques
- postage stamps, or even movie posters and comic books
