Within an investment portfolio we find classic asset classes such as stocks, bonds and cash.
Bonds, including government bonds, and cash are considered defensive asset classes, useful for providing a regular income over time. Stocks, on the other hand, expose the investor to greater risk in exchange for a higher return.
Alternative asset classes, on the other hand, make up the heterogeneous set of alternative investments. The latter offer a risk/return profile comparable to that of stocks and expand the financial portfolio by giving it a more diversified structure in terms of composition.
Alternative investments, if properly selected, are capable of fighting galloping inflation and of making the investment strategies of “classic” investors evolve.
What is meant by alternative investments?
But what is meant by alternative investments and alternative asset classes? The classification includes raw materials, private equity, hedge funds, but also works of art and collectibles with a certain economic value.
The group of alternative investments also includes cryptocurrencies and exchange-traded funds (ETFs), which are linked to baskets of stocks.
Since art and private equity are subject to rather rigid investment mechanisms, our attention is focused on commodities (raw materials), cryptocurrencies and ETFs. We find that investing in these asset classes is accessible to a wide range of savers and investors, through online investment platforms.
Among digital investment firms, CFD brokers stand out for their approach to financial markets. By leveraging contracts for difference (CFDs), investors have an alternative method for gaining exposure to asset classes.
With contracts for difference, it is not necessary to hold the asset class because the financial instrument was developed to exploit the price fluctuations of individual securities: both rising and falling.
Fighting inflation with alternative asset classes: opportunities and risks
At the beginning we said that including asset classes such as liquidity, i.e. legal tender currencies (euro, US dollar), in the financial portfolio is considered low risk for capital.
This is true and useful for balancing our investments in any scenario, however, returns are low and fail to beat inflation . This is where stocks and alternative assets come in, with their ability to generate even significant capital gains. Naturally, you will have to accept greater investment risk, which can, however, be mitigated by diligent diversification.
The risk of alternative asset classes is due to their greater volatility, meaning prices can fluctuate more than one can accept. Nonetheless, including asset classes like commodities in one's investment strategies is strategic during periods of higher-than-usual inflation.
In conclusion, to maintain purchasing power unchanged over time, it may not be sufficient to rely on classic asset classes, while alternative asset classes, added to the portfolio in the right proportions, contribute to the financial growth that each investor tends towards.
Conclusion
“The information provided here does not constitute investment research. The materials have not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such should be regarded as an advertising communication. All information has been prepared by ActivTrades (hereinafter “AT”).
The information does not contain a compilation of AT prices, nor can it be construed as an offer, advice, recommendation or solicitation to effect transactions in any financial instrument. No representation or warranty is made as to the accuracy or completeness of such information.
Any material provided does not take into account the specific investment objective and financial situation of any person who may receive it. Past performance is not a reliable indicator of future results. AT provides an execution-only service. Accordingly, anyone acting on the information provided does so at their own risk.”
The article explains asset classes well, but there is some confusion about alternative investments and how they can be combined with traditional asset classes. A practical example would be helpful to clarify.