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What are Alternative Assets?

In the past, I’ve discussed some traditional assets, including stocks, and bonds. Today, I'll be talking about nontraditional assets, or the alternative asset class.

This asset class consists of anything that doesn't fit the norm of an investment. It also tends to include assets most people can’t afford to invest in. Some examples include art, private equity, and venture capital. Oftentimes, commodities, like gold, and even real estate are considered alternative assets. However, for the purpose of this article, I’ll leave those two as their own separate classes.

Something like buying a portion of a business through a private equity firm, or funding a startup through a venture capital firm, is, ironically enough, on the more traditional side of alternative assets. The more obscure assets include collectibles, so things like sports cards, with basketball and baseball cards recently experiencing a boom in prices and popularity. This class can also include wine, watches, and vintage cars, essentially anything you purchase with the expectation of an increase in value. These assets can often experience significant gains during recessions or market downturns. Additionally, many alternative assets outperform the public stock markets.

However, there are numerous risks that come with investing in this asset class. The first is a lack of stability and a high risk of volatility. Because something like fine art or vintage cars has a very limited set of potential buyers, there is no guarantee that if you purchase an investment, it will be bought when you need to sell it. In short, even if you decide to sell, there's a chance no one would want to buy. This would provide you with no profit, and leave you with something you may not want. When compared to the bond or stock markets, this is extremely risky.

The second risk to investing in this class is the high chance of negative returns. The stock market is supported by thousands of companies, meaning an investment in this market is likely to be profitable in the long run. However, when it comes to alternative assets, many investments are risky, and odds are not favorable. For example, when funding a startup, there is no guarantee that the company will succeed. Perhaps its products fail to sell, and it goes into bankruptcy. Similarly, investing in something like baseball cards is also very risky. These kinds of investments are based on short-term trends, so once the popularity of sports cards declines, the value of baseball cards is also likely to decline.

Investing in these kinds of assets is very risky, and often very expensive. For most people, investing in the traditional stock and bond markets is likely the safest, and most profitable. Once you accumulate sufficient capital in safer assets, then investing in alternatives should be considered. Another possibility is allocating a small percentage of your money to this class. For example, up to 5% can be put into, say, baseball cards. So, even if baseball cards do end up declining in value, you still have the majority of your money in safe, reliable assets.

To sum it all up, the alternatives assets class is a class for all nontraditional investments. These range from wine, to watches, to businesses. This class comes with increased risk, but also a potential for massive returns. However, it is not recommended for the majority of people. If you happen to have an interest in some kind of alternative investment, look into putting aside a small amount of your investable money for those kinds of purchases.

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