Investors must consider their risk tolerance, investment goals, and the current economic climate when making alternative investment decisions. Due diligence and research are crucial, and there is no substitute for understanding the interrelation between total return, rate of return, and time frame for investing.
All investment decisions, including alternative investment, must include answers to a few basic questions. The investor needs to establish what level of risk they can tolerate, and they need to know if that level of risk is commensurate with the returns they seek and with the length of time they expect to remain invested. He needs to consider whether he will manage his own accounts and make all his own decisions, or trust someone else to do it for her. The investor should assess the current economic climate in relation to any investment they are contemplating, and should be prepared to do a considerable amount of research. There is no substitute for due diligence.
Alternative investment strategies for an investor are highly dependent on risk tolerance. Investors with a very low tolerance for risk might invest in government bonds. If you have a higher tolerance for risk, you might choose real estate or the stock market to include in your portfolio. You could also choose to balance a portfolio containing real estate and stock market holdings with a commodity fund or possibly a hedge fund. Every investor must understand that avoiding all risk is impossible. Ownership of bonds issued by the sovereign guarantees that the principal will be repaid, but if inflation exceeds the interest rate on a bond, a loss of purchasing power will occur.
Total return, rate of return, and the time frame for investing are all interrelated. The younger investor may take more risk, feeling they have many years in which they can earn replacement investment capital in the event an investment is worth zero, or they may feel they have so many years ahead of them that conservative investing will allow Reaching Your Goals An investor nearing the end of his career has fewer years for his investment to reach his desired goal, so he can invest more conservatively. However, if he has a long way to go to reach his goal, he has no choice but to take the risk.
Assessing the current economic climate boils down to whether the economy is growing, creating jobs, or is in a recession phase. Interest rates have a large impact on alternative investment scenarios. Stock and real estate markets tend to favor interest rates that are declining or low. Commodity futures offer the opportunity to profit in most interest rate and economic environments, although major slumps, as seen in the 1930s, greatly reduce the opportunity to profit.
In alternative investing, there is no substitute for research. If the investor chooses to have someone else manage her investments, she must be sure of the quality and honesty of her managers. If he decides to manage his own investments, she will have to spend many hours learning what he will need to know to make good decisions.
Smart Asset.
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