When everyone else zigs, do you zag? Is the road less traveled your preferred route? Maybe you’re an adventurer, a thrill seeker, or an off-the-beaten pathtaker.
No matter how you say it, sticking to the norm just isn’t your thing. So, when it comes to money and building your wealth, you want to explore all your investment options, from more traditional methods to those not-so-typical.
Whether you’re seeking to supplement your current investments or starting from scratch, you have plenty of avenues to expand your investment portfolio beyond the basics — which is a great way to ensure you’re tackling the major investment strategy of diversification.
What is diversification anyway?
Creating a diversified portfolio is one of the most common pieces of advice you’ll hear as an investor. It’s an incredibly important risk management strategy that helps neutralize the negative effects of market volatility.
Investing across asset classes, industries, and geographies will ensure your portfolio is more balanced. Even if one stock (or other holding) drops, you’ll likely still have others that are performing well — meaning you could see higher overall portfolio returns in the long run and be less likely to emotionally invest.
By determining your risk tolerance and your investment objectives, you can start to focus on asset allocation. You’ll also want to research the types of asset classes that interest you. Take the first step now by reviewing the more well-known and learning about less common asset classes you can invest in to diversify your portfolio.
You may have heard of these before.
Stocks, bonds, mutual funds, and exchange-traded funds (ETFs) are typically thought of as the most traditional investment types and might be old news to you. Stocks usually make the most headlines, and they allow investors to purchase shares of companies. Bonds, a less risky investment, represent a loan to the government or a corporation that will be paid back with interest. Mutual funds pool the money of a group of investors to purchase shares in multiple stocks or invest in many bonds at once. ETFs are similar to mutual funds but are traded like stocks and track a particular index or industry.
Familiarize yourself with other options.
Fortunately, if you’re looking to go beyond traditional investments, you have plenty of other avenues to explore when building your portfolio.
The more well-known types of funds, like mutual funds and ETFs are typically open-end (meaning the fund has an unlimited number of shares available for investors to purchase). Less common are closed-end funds (CEFs).
The main characteristics that set closed-end funds apart? They’re created by an initial public offering (IPO) and have a fixed number of shares — once all the shares are purchased by investors, the offering is closed. But that’s not to say you can’t still get in on the fund. While the parent company won’t issue any additional shares, investors can still buy and sell shares among themselves.
Similar to ETFs, closed-end funds are traded on an exchange and prices fluctuate throughout the day based on supply and demand. You may trade a CEF at a premium or discount price (based upon demand) of its Net Asset Value (or the price per share at a given time). If you buy at a discount, you can earn money by selling the share if the discount decreases or if the fund’s holdings rise in value.
CEFs sometimes use borrowed funds to purchase other, longer-term securities, an investment strategy known as leverage. The use of leverage is meant to amplify returns, although it can be risky. This means when the market is doing well, CEFs often bring in higher returns than open-end funds. The downside is that this can also make them more vulnerable to market volatility.
Keep in mind: Because CEFs are typically actively managed, they may have higher expense ratios than other open-end mutual funds.
You don’t have to be a big-shot tycoon to invest in real estate. You can purchase a single property, like a house or an apartment, and generate passive income by collecting rent from your tenant.
Often, real estate owners make a down payment on the property (typically around 20%) and finance the rest with a mortgage, then use the rent they collect to pay the remaining balance (and interest) over time. Once the mortgage is paid off, all rental income, plus appreciation of the property, is yours to keep, (though it’s important to remember that appreciation is not a guarantee).
If you’re interested in investing in real estate, learn more about your loan options — all of which are accompanied with consistently competitive rates.
Being a landlord of a rental property comes with a lot of responsibilities, like dealing with a broken pipe at 1 a.m. or trying to collect rent from someone who never pays on time. Before you commit to investing in property, make sure you’re up for the task. Or consider hiring a property manager to handle these duties.
If investing in real estate through a physical property doesn’t interest you, you may consider investing in a real estate investment trust (REIT). REITs are companies that own and operate real estate, which can range from apartment complexes to retail centers to health care facilities to infrastructure.
REITs are typically traded on a public exchange, making them much easier to buy and sell (i.e. more liquid) than physical real estate. Keep in mind that trading in and out of a REIT may have a high cost, and gains are taxed at ordinary income rates. You can invest in a REIT directly or through a mutual fund or ETF. Investors receive dividends from the REIT holdings, making them a useful asset in a fixed-income or equity portfolio.
Investing in precious metals may conjure mental images of a treasure chest brimming with gold coins and overflowing with silver jewelry. But in reality, you can invest in gold, silver, and platinum in a couple of ways — one being by simply purchasing stock in a mining company or investing in a metal ETF through our Self-Directed Trading, which offers commission-free trading.
If you really want to diversify your portfolio, though, you might want to consider investing in physical metal products (like coins, bars, or bullion).
Gold, the most popular precious metal investment, is an asset class unto itself, and some call it the great portfolio diversifier. Why? Because it doesn’t strongly correlate with other asset classes. In other words, if your tech stocks and healthcare ETFs are down due to market influences, your investment in gold is less likely to be down as well.
Gold can be a beneficial investment because of its ability to preserve wealth. It’s known as a hedge against inflation, meaning its value is not dependent on the dollar — it maintains, appreciates, or drops in value depending largely on supply and demand. Consider this: A gold bullion worth $500 and $500 in cash can buy you the same amount today. But in 50 years, adjusting for inflation, that same gold bullion could be worth more than $1,500, but your $500 in cash? It’s still just $500.
However, keep in mind that it may be difficult to find buyers when selling physical bullion, (and you’ll need something more secure than a treasure chest to keep all those coins and bars secure).
The foreign exchange market, or forex, is the marketplace where national currencies are traded. It’s the largest market in the world with trillions of dollars in daily volume. The forex market is essentially made up of an electronic network of banks, institutions, brokers, dealers and individual traders. There are no centralized exchanges like the stock market. Forex market hours are 24 hours a day opening on Sunday at 5 PM ET and closing on Friday at 5 PM ET.
Forex currencies are traded in pairs, where you are buying one currency by exchanging or selling another currency at the same time. For example, if you are buying the currency pair EUR/USD (Euro vs US dollar) you are essentially buying the base currency EURO by selling or exchanging the counter currency US Dollar. Forex pairs are quoted in base currency, for example if the currency pair EUR/USD is quoted at the offer price of 1.1111 it means you can purchase 1 Euro in exchange of (by selling) 1.1111 US dollar. Market fluctuations determine the profit or loss on a forex trade and due to more leverage, it also comes with higher risk and reward potential.
To invest in the forex market, you’d likely want to open a standard trading account with a forex broker, like Ally Forex.
Should you explore non-traditional investments?
Whether you like to stick to the tried and true or prefer a bit of exploration in your financial life, there are opportunities for everyone. Remember, the components that make up your portfolio should reflect your investment objectives and the risk you’re willing to take on — both of which can evolve over time. If you’re a beginning investor, you may want to stick with more familiar holdings like ETFs, stocks, and bonds. But as you get more comfortable, experienced, and confident in expanding and diversifying your portfolio, there’s a world of not-so-average investments to consider.
Ready to explore your investment options?
*Note that not all risks concerning these investments tools have been discussed in the material provided. Investors should take time to fully understand the risks associated with each type of investment, including, but not limited to: Exchange Rate Risk, Interest Rate Risk, Credit Risk, Country Risk, Liquidity Risk, Leverage Risk, Transactional Risk, Holding Costs, Volatility Risk, Market Risk, Idiosyncratic Risk, etc.