Almost anything of value can be used as an investment, but alternatives usually come with more risks and higher costs.
POINTS TO KNOW
- For most investors, a portfolio of stocks and bonds provides plenty of diversification. Only the most sophisticated investors should consider alternative options.
When it comes to alternatives, tread carefully
Nearly anything that has the opportunity to increase in value can be used as an investment.
Here are some examples of common alternative investments.
A commodity is a good that is basically interchangeable with the same good from another producer. For example, wheat, oil, beef, and coffee are commodities.
While it's possible to invest directly in commodities (say, by buying 10,000 pounds of sugar), most commodities are traded through "futures contracts"—a promise to buy or sell a certain amount of the commodity at a specified price on a certain date.
Buying gold, silver, platinum, or other precious metals is sometimes touted as a way to hedge the risks of more traditional investments. However, prices of these metals can be extremely unpredictable and volatile.
Trading in commodities and futures is very specialized and not available through Vanguard.
Investing directly in real estate can mean buying, selling, and maintaining a collection of properties—which is expensive and time-consuming.
Many people already have a large exposure to real estate—through owning a home. For most investors, this plus an investment in a broad portfolio of stocks and bonds (which can include real estate investment trusts and mortgage-backed securities) offers plenty of exposure to real estate.
Master limited partnerships (MLPs)
MLPs exist mostly in the energy industry. Direct investments in MLPs could provide more favorable tax treatment than you'd get by investing in an energy fund or by buying a specific energy company's stock.
However, MLPs typically come with very high costs and added tax complexity.
Usually refers to common stock, which is an investment that represents part ownership in a corporation. Each share of stock is a proportional stake in the corporation's assets and profits.
A bond represents a loan made to a corporation or government in exchange for regular interest payments. The bond issuer agrees to pay back the loan by a specific date. Bonds can be traded on the secondary market.