What is an alternative investment?

An alternative investment is any investment that falls outside the traditional areas of cash, bonds and stocks.

Since they have a low level of correlation with traditional investments, and are therefore less exposed to market conditions, alternative investments can be used as a way of reducing the overall risk of your investment portfolio by diversifying it. A number of alternative investments, such as EIS, also include significant tax incentives.

Investing in these sorts of assets often necessitates a particularly high level of analysis as it can be difficult to determine their current market value; think, for example, the level of expertise needed to know which work of art is most likely to appreciate in value over the years.

It's up to you which, if any, alternatives you decide to include in your portfolio. The good news is that the range of options available to investors has increased substantially over the years.


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Alternative investments, a risky business?

There are, of course, people who don’t believe alternatives belong in a portfolio. One of these naysayers is George Papadopoulos, a wealth manager at Novi. George cites a lack of liquidity and transparency in his reasoning – a point that does hold true for certain alternatives. Other sources, including Baird & Co's research as cited by the Wall Street Journal, indicates that including alternatives in your portfolio can increase the likelihood of generating returns.

As with any investment, you need to be fastidious in your due diligence prior to committing your cash to an alternative. Take a deep look at the investment requirements and ensure that your portfolio can accommodate the potential risk and longer-term holding positions that may be required. Remember that historical performance is not an indication of future returns, and seek the guidance of your financial adviser where necessary.

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