All investment decisions, including alternative investing, should involve answers to a few basic questions. The investor needs to establish what level of risk she can tolerate, and she needs to learn whether that risk level is commensurate with both the returns she is seeking and with the time during which she expects to remain invested. She needs to consider whether she will manage her own accounts and make all her own decisions, or if she trusts someone else to do that for her. The investor should evaluate the current economic climate as it relates to any investments she is contemplating, and she should be prepared to do a considerable amount of research herself. There is no substitute for due diligence.
Alternative investing strategies for an investor depends highly upon risk tolerance. Investors with a very low risk tolerance might invest in government bonds. If she has a higher risk tolerance, she might choose real estate or the stock market to include in her portfolio. She might also choose to balance a portfolio that contains real estate and stock market holdings with a commodities fund or possibly a hedge fund. Every investor needs to understand that avoiding all risk is impossible. Owning bonds issued by the sovereign guarantees the principal will be returned, but if inflation outpaces a bond’s interest rate, a loss of buying power will result.
Total return, rate of return and time frame for investing are interrelated. The younger investor can take more risk, feeling she has many years in which she can earn replacement investment capital should an investment go to zero value, or she may feel that she has so many years in front of her that conservative investments will enable her to reach her goals. An investor nearing the end of her working career has fewer years for her investment to reach the desired goal, and so may invest more conservatively. If she has far to go to reach her goal, however, she has little choice other than to take on risk.
Evaluation of the current economic climate boils down to whether the economy is growing, creating jobs, or is in a recessionary phase. Interest rates have a big impact on alternative investing scenarios. Stock and real estate markets tend to favor interest rates that are declining or low. Commodities futures offer opportunity for profit in most economic and interest rate environments, though major depressions, such as seen in the 1930s, greatly reduce opportunity for profits.
In alternative investing, there is no substitute for research. If the investor chooses to have someone else manage her investments, she should be certain of the quality and honesty of her managers. Should she choose to manage her own investments, she will need to put in many hours learning what she will need to know to make good decisions.
