Alternative Investments for Beginners

There are more investments beyond stocks and bonds

What are alternative investments?

Alternative investments encompass a wide range of assets that fall outside the basic asset categories like cash, stocks, and bonds. Investors use alternative investments to diversify their portfolios or to capitalize on market conditions, opportunities, or unique interests and knowledge bases.

Examples of alternative investments

Some examples of alternative investments that you may encounter in the real world include:

• Real estate, including properties owned directly, limited partnerships in real estate, real estate development companies, and real estate investment trusts.
• Major limited partnership companies that can own and operate everything from oil pipelines to amusement parks.
• Tax lien certificates.
• Shares or membership units in a business that is not publicly traded.
• Commodities including precious metals like gold, silver, platinum, and palladium, as well as crude oil, natural gas, ethanol, corn, soybeans, wheat, cocoa, coffee, or sugar.
• Agricultural land.

Advantages and disadvantages of alternative investments

Before engaging in alternative investments, it is wise to be aware of their potential benefits and drawbacks. Among the advantages:

• The potential for tax trading or sheltered trading.
• The existence of inefficient markets that can lead to opportunities.
• Mental and emotional satisfaction.

Among the disadvantages:

• The possibility of negative tax consequences.
• Lack of transparency leading to substantial hidden risks.
• More complex investments.

Why do investors turn to alternative investments?

There are many reasons that investors or portfolio managers may consider adding alternative investments to their balance sheets, including:

• Differentiated tax treatment.
• Favorable conditions.
• Unique skills or knowledge.
• Intellectual interest.
• Control.
• Collaboration.
• Groups.

Disadvantages of alternative investments

Alternative investments involve complexity and carry significant hidden risks.

Generally, novice investors should exercise caution when exploring unconventional investments. The desire to avoid investing in something that is not well understood may help mitigate risks.

Alternative investments can sometimes be a source of negative tax burdens. For example, if you have a self-directed retirement plan, such as investing in a limited partnership in the oil and gas industry through your retirement plan. In this case, there may arise a situation where your retirement plan is required to file its own tax return and pay taxes. This can increase complexity and cost.

Furthermore, you may be required to pay significant taxes manually even if no cash was distributed to you during that tax year.

Source: https://www.thebalancemoney.com/alternative-investments-for-beginners-4144347

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