What are alternative investments?

One of the first things people are told to think about when they’re investing is to make sure that they’re diversified, in other terms, not putting your eggs all in one basket.

You want to have your money split between various things so that if a crisis is happening in one part of the market the other areas your money is invested in will steady the ship.

‘Alternatives’ can play a handy role in achieving this and have proven to be especially useful during periods of very intense market volatility during the past few months and years.

What are ‘alternative’ investments?’

The word alternative is defined as ‘one or more things available as another possibility or choice’ and in a market sense, these cover pretty much anything outside the ‘traditional’ trinity of stocks, bonds and cash.

Some examples of alternatives are physical assets such as property or commodities like gold, oil, silver but it also covers specialisms such as timber or art.

Things like private equity and private credit also come under the alternatives umbrella due to the fact that they’re not listed on the public stock market, offering a ‘same but different’ set up to equities.

Alternatives as a group is therefore quite a mixed bag because it’s essentially where anything that doesn’t fit into the classic trio lives. Hence, why things such as cryptocurrency and Bitcoin are also classified as alternatives.

Crypto is a fairly ‘new’ example, whereas assets such as whiskey, even handbags – a la the Hermès Birkin bag – have long been known as different stores of value.

This all-forms part of what is often referred to as ‘multi-asset’ investing, holding different types of assets to create this complimentary, diverse portfolio.

How do you use alternatives?

Going back to the message up top and the foundation of any portfolio should be diversification which can help protect your wealth generation during times of market stress, helping to build it for the long term by having different types of investments working together to make returns in different ways.

The standard formula for this is the ‘60/40’ split, with 60% in equities – company stocks – and 40% in fixed income – usually government or corporate debt.  

Equites tend to generate the lion’s share of total returns but come at a higher risk, which is where bonds come in as a more stable source of return via its yield.

Alternatives used to form a smaller sub section of this 40% but over the past few years as the quality and access to alternative assets has grown combined with demand for more diversity means that a 60-20-20 split is often the go-to.

Key things to note

Here’s a delicious analogy to help you get to grips with the difference between traditional investments and alternatives. Imagine traditional investments – your shares, bonds and cash – as traditional ice cream flavours: chocolate, strawberry and vanilla. And the rest of the ice cream flavour universe – your pistachio, honeycomb and blueberry – are your alternatives.

Though your traditional ‘flavours’ might not be the most exciting of options, you know what you’re getting, and they’ve a proven track record of performing (being delicious). While alternatives are always tempting, and you’ve heard great things, they carry more risk: their performance can be patchy and they could be all ‘style over substance’, potentially leading to some big disappointments.

Perhaps likening traditional and alternative investments to ice cream flavours is a touch irreverent, but who cares? It’s much more fun to think about subjects like this.

Do AJ Bell or Dodl offer alternative investments?

AJ Bell Money Matters’ partner investment platforms, AJ Bell and Dodl, offer a wide range of investments to choose from but, due to their heightened level of risk, alternative investments don’t really feature heavily.

Dodl offers over 100 funds, exchange traded funds and shares, all of which would fit neatly into the box of traditional investments. While AJ Bell offers thousands of investments, most of which are traditional in nature, some could be better described as sitting in a bit of a grey area. They include Alternative Investment Market (AIM) shares for smaller, growing companies, exchange traded commodities, or funds investing in property. These investments tend to appeal to the more experienced and risk-taking of investors.