For the most part, I am a boring investor. I mostly stick to stocks and bonds, usually investing in index funds or ETFs. However, I do have a few other investments in my portfolio. I am starting to build a dividend portfolio, and I have an interest in REITs. These are income investments that can provide me with income streams down the road. But I am careful with the money I put into these investments since I am picking them, and I want to avoid over-extending myself by investing money I can’t afford to lose.
For those with the appropriate risk tolerance, it can make sense to add some exotic investments to the portfolio in order to give it a little more room for growth.
There are a number of options when it comes to adding more exotic investments to your portfolio. Many people like to add commodities and currencies. This is made even easier due to the fact that you can find currency and commodity ETFs that make it easy to trade (although you do need to watch out for contango). While commodities and currencies can certainly qualify as more “exotic” than your “normal” asset allocation of stocks and bonds, they aren’t your only choices.
Indeed, you can also invest in different types of bonds. Many consider emerging market bonds somewhat exotic. You can get a higher yield on this debt than you would ever get with Treasury investments. In many cases, you can do better with emerging market bonds than with municipal bonds — assuming the issuing entity doesn’t default.
Other exotic investments might not be something that you buy and sell on an exchange. Some of the other items that many add to their investment portfolios include things that we might consider collectibles:
When invest in these items, though, it’s a good idea to really understand what you’re doing. Building a more exotic collection of assets often means that you have to be willing to spend a little more money, and you have to know what makes something valuable.
In fact, understanding what makes something valuable is a good idea no matter what you are investing in.
Even if you decide that you understand the basic principles of investing in commodities, or if you know what makes a piece of jewelry a valuable long-term investment, you still need to take a step back.
Often exotic investments require a higher risk tolerance. You need a better ability to handle loss when you invest in these types of assets. Many traders believe that currencies and commodities are considered riskier than stocks and bonds. While there is a greater chance of bigger gains, there is also the chance of bigger losses.
When you build a collection of physical assets, you have to be able to handle it if they lose in value. That painting you bought for $3,000 from a promising young artist may prove to be practically worthless if sentiment doesn’t go turn in favor of the artist. On top of that, you need to be aware of the risk of loss due to damage or theft. You can purchase insurance to protect you to some degree, but setting the value can be difficult, and you need to be prepared for the fact that some items might be irreplaceable.
Finally, you need to think about the effect of having your capital tied up for a long period of time. Can your finances (and your emotions) handle that? Many people are reluctant to invest in property because it requires a large amount of capital, and the capital is tied up for years — or decades.
Think about your level of risk tolerance, and consider whether or not exotic investments are likely to work for you. It can make sense to add a little something different to your portfolio, but you do need to avoid overloading your portfolio with one type of investment, no matter how attractive you find it.
Photo by StockMonkeys.com.
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