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How to mitigate short and medium-term market volatility with alternative investments and how to avoid potential scams

More and more people are investing up to 15% of their portfolio into riskier but potentially more rewarding alternative investments. This article looks at why people are investing in non-traditional investments and what you can do to minimise the chances of falling victim to unregulated scams.

Written on 13 June 2024

Whether you are a sophisticated investor or you are using an independent financial advisor, you may want to consider a mix of different investment types in your portfolio, including low, medium, and even potentially higher-risk investments.

Your investment portfolio should be aligned with your risk profile and future financial objectives, with 85% of your investments tied up in standard, long-term market-based structures such as stocks, bonds, and commodities.

In recent years, we have seen economic and political stability across the world shaken by global and local events. With ongoing conflicts and potentially major political changes in the US, UK, and EU looming as each faces major elections in 2024, it's likely that the markets will remain volatile in the short to medium term and are unlikely to deliver inflation-beating returns.

As such, investors of all types are increasingly looking at alternative investments to diversify up to 15% of their total portfolio and remove their reliance on markets.

People with an investment portfolio over £200k or $300k are likely to have earmarked up to 15% for slightly riskier but potentially more rewarding short-term investment opportunities, including alternative investments, which may also be more fluid.

Alternative investments typically do not follow the stock market, which means they add an element of diversification to your portfolio and may help you avoid the impact of political or economic turmoil.

While long-term investments are likely to remain sound, people looking for shorter-term wins and are open to a little more risk may wish to consider alternatives that aren't as affected by market conditions.

Alternative investments may also offer tax benefits, which traditional investments do not.

However, alternative investments are much riskier and often unregulated, which makes decision-making incredibly difficult.

This article looks at some of the options available (although it does not discuss crypto-currencies) and what you can do to avoid falling for scams and dangerous investments.

This article does not constitute advice, and you should always seek formal advice from an independent financial advisor before making any decisions, especially regarding alternative investments.

How to choose a suitable alternative investment and avoid potential scams

For expats, alternative investments exist outside of typical regulation, which means that the risk of losing your investment is much higher. However, with the correct research and approach, you can mitigate many risks and give yourself a better chance of short-term investment returns.

The following checklist provides some key areas to focus on when selecting an alternative investment.

  • Establish your short-term goals - alternative investments are typically shorter-term, so what are you looking to achieve? Are you seeking regular payouts from your investment and overall growth, and over what time frame?
  • Limit your total investment to 15% of your total portfolio - while some investments might seem foolproof, you should never expose more than a small proportion of your investment to inherently high risks.
  • Don't try to do it alone - always seek advice from an independent financial advisor or wealth manager, even if you are considered a sophisticated investor. Independence is key here, so try to avoid getting advice from an advisor who is tied to particular products and investments.
  • Check how any advisor or introducer gets paid - especially if an advisor has presented you with the options. Ask how they get compensated and ensure their compensation isn't from your investment.
  • Compare different options - don't just go with the first one or one with the highest returns. Make sure that the investment is right for you.
  • The importance of due diligence - ultimately, the final decision on whether to proceed will be down to you, even if you have sought advice. When there are little to no regulatory bodies protecting you, you have to be sure that you are aware of what you are investing in, so there is no such thing as too much due diligence. Ask for as much background material as possible, research the people behind the investment, and step away before signing anything if you are unsatisfied.
  • Know your tie-in periods and future obligations - and don't get caught up in the small print.

Questions to ask when choosing an alternative investment

Whether you are working with an independent financial advisor or looking through a range of investment opportunities, there are questions you should be asking.

We have collated a few of the more important questions you should be asking – and ensuring you are comfortable with the answer. If the question remains unanswered, ensure you keep pushing until you feel the question has been fully answered.

  • How is my investment going to be used?
  • What is the investment term?
  • How is my capital protected?
  • What is the minimum investment?
  • What returns can I expect, and how will I receive them?
  • When will I start to see returns?
  • What are the potential risks?
  • What are the tax implications?

Get clarity around any fees and costs

Are you sure about the costs of receiving advice and how your advisor getting paid?

With fees and costs, remember that fee-based advisors will likely still charge fees based on a percentage of the total investment. This does not necessarily mean that the advisor is receiving commissions – but do check how the advisor is getting paid and check that any fees paid are not coming from your investment.

Getting advice you can trust regarding alternative investments

As previously stated, you should not make a decision about an alternative investment without seeking independent financial advice beforehand.

Ensuring you understand your risk profile and how different investments align with your financial objectives is something you shouldn’t attempt to do on your own.

Experts for Expats has created a trusted network of independent financial advisors and wealth managers who can guide you and help you understand which options are best for you. All of our partners operate on a fee basis and are independent from the underlying financial products and investments.

As part of our introduction service, our hand-picked partner will offer in free discovery call lasting up to 30 minutes which will enable you to ask questions about investments and wealth planning, and also understand more about your options. Our partner will also be able to ask you questions about your situation and financial plans to identify any cost savings or potential opportunities to grow your investments.

The discovery call will not provide you with formal advice, however our partner will provide you with an overview of their fees, services and expertise giving you the opportunity to decide whether you wish to engage them to get formal advice. If you decide to proceed, our partner will conduct and in-depth fact find with you and review your current investments before offering advice about next actions.

At no time are you under any obligation to proceed with advice on offer.

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