Wealthy investors in wealth categories II through IV (see our article “What Category of Wealth Do You Have?”) utilize investment products and strategies about which the rest of us know little, or in which we aren’t legally eligible to participate. These alternative products are typically used to provide more diversity in a portfolio.
Alternative Investments are commonly defined as investments that don’t involve stocks bonds or cash savings.
Most of these alternative types of investments carry significantly more risk than stocks, bonds or cash investments. If you are interested in pursuing these investment types, and reside in the US, you may need to be an accredited investor.
The SEC definition of an accredited investor is quoted below:
“The federal securities laws define the term accredited investor in Rule 501 of Regulation D as:
- a bank, insurance company, registered investment company, business development company, or small business investment company;
- an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
- a charitable organization, corporation, or partnership with assets exceeding $5 million;
- a director, executive officer, or general partner of the company selling the securities;
- a business in which all the equity owners are accredited investors;
- a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase;
- a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or
- a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes. “
Recently The Millionaire Corner posted some statistics about the types of alternative investments people with a net worth of $15 – $25 million dollars in investible assets.
In that group, 2/3 owned Real Estate Investment Trusts (REITs); 2/3 also reported being engaged in a limited partnership; 55% owned precious metals; 51% owned private equity; 45% owned commodities; and 50% owned hedgefunds.
Trading foreign currency as an alternative investment.
Another type of alternative ‘investment’ involves foreign exchange currency trading.
If you have ever traveled to a foreign country you probably changed your dollars into the currency of the country you are visiting. For example, if you went to the Olympics in London this year, you most likely exchanged at least a few of your dollars for pound sterling. This is know in foreign exchange (Forex) trading as a currency pair. US dollar/British Pound or USD/GBP.
If you did your exchange when the dollar was stronger (worth more in exchange) than the pound, you got more than one pound for your one dollar. If you exchanged your pounds back to dollars when you got back, and the dollar was even stronger than the pound at that time, you made a little bit of money on your ‘exchange trade’.
Basically that is what it is all about. This video from Alpari in the UK explains it pretty simply.
You can ‘bet’ (trade) on multiple different pairs of currencies. Many of the Forex trades involve either the US dollar or the Euro, but there are many other choices.
I have never personally done any currency trading, even just to get money to use on a vacation in another country (I still have a lot of places in the US to visit before I mess with passports, languages and foreign currencies).
It seems like it would take quite a lot of education to learn how. In fact most online Forex trading platforms strongly suggest using, and make available, demo accounts so that you can get the hang of it.
In addition, the downside risk may not be limited, as you can trade on the margin.
It also seems like it would take quite a lot of time, and be quite fast paced, which doesn’t suit my style.
Although I qualify as an accredited investor, I don’t believe Forex Trading is for me, at least for now.
For those more adventurous, check out the Alpari platform, which lets you trade Forex as well as other things such as Contracts for Differences. You can trade CFDs online with Alpari using the tools on their site.
On their site, they explain CFDS as follows:
“Contracts for difference (CFDs) are derivative products which enable you to trade on the price movement of financial assets (such as e
quities or indices). The main benefit of trading CFDs is the flexibility to trade against price movements without actually buying or selling the physical financial assets. “
Wow, I would really have to study up on these guys!
In summary, Forex Trading and other alternative types of investing activities (such as using CFDs) are utilized by investors who can afford to lose the money with which they are trading, and can afford the downside risk. The upside rewards can be great but the main reason wealthier folks utilize any type of alternative investment is to diversify their asset base, so that all of their wealth is not affected when one sector (such as stocks) takes a hit.
Have you ever traded currencies? What tools did you use?