Just as sugar and spice do not fit neatly into the four food groups, there are a number of investments that are difficult to classify. Alternative investments range from vehicles that combine features of bonds and stocks (income trusts), stocks and options (structured products), tax-driven products (limited partnerships), to investments wrapped within insurance policies (universal life).
Additional alternative investments include hedge funds, which are designed to offset swings in the stock market, and options, which can be used both to protect your portfolio and as source of profit, if skillfully traded. You may encounter split shares, which divide common shares into separately traded growth and income components.
Alternative investments make sense once you have built a diversified portfolio. First lay a solid foundation for yourself. Then explore the sugar and spice of alternative investments.
You don't need reminding that investing your money, like driving your car, carries considerable risk. Life itself is risky. But while risk is unavoidable, you can reduce its cost. The key to reducing risk is to know what you are doing, to look before you leap.
Thinking about investment risk, most investors worry about losing money, making mistakes, being lied to, and becoming poor. These negative thoughts can lead to an overly conservative investment strategy, one that may not accomplish your life goals due to low returns, high taxation, and a decline in purchasing power.
Other investors embrace risk, hoping to make a fast buck, seeking to become wealthy without work, skill or patience. Common sense tells you how this approach will turn out in the long run.
Here's what you need to know before you invest. Ask yourself these two questions:
- What is my money for?
- When will I need my money back?
How you answer these questions will help you determine your correct investment strategy. For example, if you answered that your money is for your retirement twenty-five years from now, you need a very different investment strategy than if you answered that your money is your down payment for a house purchase in the next two years.
After you outline your basic strategy, you'll need to define your investment policy. Consider how diversified you should be, based on your investment knowledge. What types of investments are too risky - or too conservative - for you? Start with your asset mix decision, and then work down to the individual investment level.