How to Reduce Your Risk When Diversifying into Alternative Investments
According to Bank of America’s Bull & Bear indicator, which is used to gauge sentiment among Wall Street traders, the most recent survey reveals an ‘uber bearish’ market with a rating of 0.0. Previous moments in history when this gauge has hit zero were the dotcom bubble burst in 2002, the Great Recession in 2008, and the beginning of COVID in 2020. With the large amount of volatility in the stock market recently, many investors are beginning to consider moving some of their portfolio into “non traditional” or alternative investments outside of traditional stocks.
If you’re just starting to diversify your portfolio, it can feel overwhelming and risky to invest in non traditional assets. Yet the rich do it on a regular basis, focusing on cash flow and growth. Yes, many have financial advisors helping them make these moves, but the reality is you don’t need a high paid financial advisor to start taking action. In this article, we will walk through the simple steps you can take to lower your risk when investing into any alternative asset, whether it be multifamily real estate, crypto, ATM’s, or any other variety of asset outside of the stock market.
Learn about the landscape of alternative investments
The first step is to get a high level understanding of what alternative investments exist. You don’t need to deep dive into the minutia of every asset. Instead, focus on getting an understanding of how it works, the benefits, and the risks associated with the investment. The goal here is to get a feel for what options are available to you and how they might fit into your portfolio. You can then map them out based on risk level, minimum investment needed, etc. so you can have a clearer picture of what will fit into your personal financial strategy.
Revisit your financial situation and goals
Once you have a high level map of the opportunities available to you, revisit your personal financial situation and goals. Start with big picture with questions like “What financial goals am I trying to accomplish in the next 5 years?”, “What major life events do I anticipate coming up soon or would I like to have money for?” and “How much risk am I willing to take in the near future?” Then hone in on more specifics like “How much money do I have to invest right now?”, “Does it make sense for me to sell any of my other assets to diversify into another one?”, and “What are my specific cash flow or wealth creation goals for this year?”
Pick an asset class to focus on
Once you have a high level understanding of what alternative investments you have available to you and what your financial goals are, you can start narrowing in on which assets align with your goals, risk tolerance, and available funds. A pattern you may notice amongst the wealthy is that they often pick an asset class and become very educated in it or, partner with someone who is very educated in it before they dive in. It’s important to focus and prioritize vs trying to dabble a little bit in everything.
Remember, you don’t have to become an expert all on your own. The most powerful tool that the ultra wealthy use is finding experts in a space and partnering or learning from them. This is the key to expediting your growth path. Find someone you trust who is knowledgeable and willing to educate you on the investment vehicle you want to focus on. This will also help you to avoid mistakes that you may make if you were to try to do it solely on your own.
Start with a small investment
Education is great, but it will only get you so far. At some point, you’ll have to take the leap to actually start investing in whatever alternative investment you’ve decided to focus on. One way to mitigate your risk is instead of pouring half of your funds into the investment and going “all in”, take a small amount and make an initial investment based on your research. While your gains might not be as large because your principal investment is small, consider your first investment an extension of your education.
This will be a valuable learning experience where you can gain further confidence and perhaps even uncover unexpected risks or benefits you didn’t expect. Plus once you have some level of experience under your belt, you can start developing deeper connections with others and learn about more opportunities to invest if it meets your expectations. Of course, the flip side is, if the investment does not go well, you haven’t lost a critical amount of money. You can evaluate what went wrong, what you’d do differently, and if it’s time to consider an alternative path.
Remember, this is general advice and not meant to be specific to your personal situation. Only you, along with your trusted advisors like a financial advisor or CPA, will be able to decide what makes the most sense for your financial wellbeing. Our advice is do not let fear of the unknown stop you from pursuing new knowledge and education about investments that might challenge your current perspective. There are unlimited opportunities for all of us to profit from and having an abundance mindset will enable you to start seeing these opportunities in your own life.
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