5 Alternative Investment Approaches3 min read
WHAT ARE ALTERNATIVE INVESTMENTS?
An alternative investment is a class of investment that are not covered under any Government regulatory like RBI, SEBI, IRDA, and PFRDA. It refers to a privately pooled investment fund – a trust or a company.
Here are some alternative investments approaches that may influence your investment decisions –
#1 FOCUS ON ABSOLUTE RETURNS
You invest to end up with more money than what you started with. It means you are looking for an absolute return: how much did you actually make, is the main focus.
Invest in assets that you believe will do well; don’t invest in a product just because it’s likely to outperform the market. Have your analysis on hand.
#2 RETURNS ARE ONE-DIMENSIONAL, RISK IS MULTI-DIMENSIONAL
When it comes to investments, returns are easy to calculate. Keep your focus on Risk involved with the alternative investment asset as well. Prepare a list of the relevant risks. You need to have a clear idea of the risks involved in your investment, as it will help you to take a calculated decision.
Also, if at all something unexpected happens, you will be more likely to make better decisions if you’ve thought about the risks before investing.
#3 KNOW THE SOURCE RETURN
Understand what will influence and drive the returns on your investment. While you hold the investment, monitor the value of your investment.
Constantly revisit your assumptions of the return drivers of investment, in case they don’t match your parameters or expectations rethink your investment.
#4 UNCLEAR IS GOOD
Anything that’s not traditional is alternative. An alternative investment is populated by investment ideas that may not be immediately obvious. For instance cryptocurrency.
Continuously learning, exploring, researching, studying, and looking outside your comfort zone is the key to financial success.
#5 DIVERSIFICATION IS A MUST
Holding a mix of assets that are equally good, but which behave differently, will leave your portfolio’s return intact, and lower its risk as well.
Diversify means constructing a portfolio with very varied return drivers and risk parameters, not just different assets.
Most of us see investing in alternative investments highly risky. However, if you desire to live a successful and fulfilling life and retire with enough money to enjoy your retirement years, you must take calculated risks. This includes risks in your relationships, risks in your career, and risks in your investments.
While taking smart calculated risks is vital to reaching your goals in life, remember that taking bad risks and losing can set you back, sometimes significantly. It may help, however, to remember that taking smart risks is as simple as making wise decisions.
A Framework for Good Decision-making
I’ve learned a lot in my life from observing others and through my personal experiences-both good and bad. Therefore, when I consider taking a risk in any area of my life, here are the questions I ask myself:
1. What are the risks? Be honest. Don’t let your emotions prevent you from carefully considering all possible risks. This is where the landmines exist.
2. What are the odds of one of the risks coming true? Be truthful. Use real data whenever you can by doing research and talking to others.
3. What are the rewards? Be realistic. Can you really quit your day job and devote ten hours a week to something and make $100,000 a year? (Probably not.)
4. What are the odds of those rewards? Be sensible. Find out how many others have done something similar and how they have fared.
5. What other options do I have? Be creative. Don’t limit yourself. Consider all possibilities.
6. Do I need to make this decision today? Probably not. Take the time you need to do your research and explore your options.
After you finish answering these six questions, remove the emotions from your decision and ask what your gut is telling you. Also, never forget about the wild card risk; you don’t know what you don’t know!