Alternative Ways to Invest with ETFs

When I have a little extra money to invest, I like the idea of trying something a little different. While most of my investments are very boring (think index ETFs and dividend aristocrats), I do have a few somewhat alternative investments in my portfolio — just for fun.

ETFs make it a little easier to get a bit out of your comfort zone and mix it up in your investment portfolio. If you have a little play money, and you are looking for some alternatives to stocks and bonds, exotic ETFs and alternatives can be one way to go.

Adding Commodities and Currencies to Your Portfolio

This year, I’ve been participating in an investment challenge with several other bloggers. It’s been a lot of fun, and I’ve been able to play around a little bit, trying things I wouldn’t normally do. One of the things I did was to buy shares of a commodity ETF.

Not only does this commodity ETF provide me with portfolio exposure to precious metals, but it also pays dividends. It’s been kind of a fun way to go about things. Unfortunately, it hasn’t been doing all that well, thanks to the fact that a relatively strong U.S. dollar has meant that commodities aren’t seeing a lot of gains. But it was a fun experiment on hedging, just in case things went south.

You can use ETFs to easily gain exposure to asset classes you wouldn’t normally trade, and do it with relative ease, since ETFs are traded like stocks on exchanges.

Another possibility is trading currencies using ETFs. There are a number of currency ETFs that allow you to add this bit of diversity (and volatility) to your portfolio. Boosting your inclusion of these somewhat alternative asset classes has the potential to add growth to your overall portfolio. It can be one way to further diversify, and step a little outside what’s considered “normal” with today’s investing portfolios.

However, it’s important to be careful when investing in commodities and currencies using ETFs. It’s important to understand that you aren’t actually investing in the commodities and currencies themselves. These ETFs follow certain investments, but they are derivatives and not direct investments. Additionally, it’s important to understand that you can run into trouble through something called contango.

Because commodities are futures-based, there is a chance that near-month futures end up being less expensive than futures that expire later on. This can mean that, during a roll in the ETF, there is a chance to sell low and then buy high. This is one of the risks you run into when you get a little more into these exotic ETFs that go beyond stocks and bonds.

If you decide to go this route, it’s important to understand the possibility of contango, and be prepared for it. You also need to be prepared for the fact that the underlying assets, especially currencies, are often viewed as more volatile than “standard” investments like stocks and bonds. You need the risk tolerance to handle these swings, which is why it makes sense to use money that you can afford to lose. It’s why I used “fun” money as part of the challenge, rather than committing funds that I’m planning to use to build my retirement future.

Real Estate ETFs

It’s also possible to add real estate to your portfolio through ETFs. Even if you don’t want to buy the property yourself, it’s possible to get exposure to real estate — including real estate in other countries — with the help of real estate ETFs. It’s even possible to find real estate ETFs based on REITs, allowing you access to a diverse set of real estate investments.

As with commodity and currency ETFs, though, it’s important to understand that you aren’t actually buying real estate. ETFs might following the underlying investments, and you might be getting exposure to real estate companies, but you aren’t actually buying real estate. It’s important to make that distinction.

ETFs make it easier to diversify your portfolio through exposure to asset classes that you might not normally gain exposure to. Because they are easy to buy and sell, there aren’t the same barriers to entry that you might see if you were actually investing in commodities or real estate. But there are still risks, and it’s important to understand them before you move forward. Rather than putting a large portion of your portfolio in these assets, it might make sense to limit your exposure to 10 to 15 percent devoted to alternative ETFs.

Should You Take Investment Advice from People You Know?

Piggy savings bankIt always seems as though someone you know has a friend who got rich off an investment opportunity. Or what about the guy at the office who is always talking about how well his portfolio is doing? When you look at your own investments, it might be tempting to get advice from the people you know to try and boost your returns a bit. Before you believe what your sister-in-law says about the next big thing, though, it’s a good idea to step back and decide whether it’s always a good idea to take investment advice from people you know.

What Do They Know?

First of all, it makes sense to find out what they actually know. Where is the information coming from? Is your friend or relative offering information based on careful study? Does he or she have experience with investing, either as a professional or an advanced amateur? Or is the information coming from a friend, or a “business associate”?

If someone you know is getting their advice from someone else, and then passing it on to you, it’s a good idea to be wary. This is one of the ways investment scams are perpetrated. Your friend may not know that this is a scam, and if you follow along, you could get caught up in it.

Be skeptical if your ordinary acquaintance suddenly claims an “inside track” or if your friend claims to be getting information from some other source. Vet the source of information, and do your own research. It’s rarely a good idea to rely entirely on the claims of a friend or relative.

Will the Advice Really Work in Your Situation?

Another consideration is the fact that finances and investing are very personal. Just because a certain strategy works for someone you know, it doesn’t mean that it will work for you. There are a number of considerations at play. Consider whether or not you have the same long-term and short-term investing and financial goals, as well as whether or not you have a similar risk profile.

The reality is that the strategy that your uncle is using right now during retirement isn’t like to be the strategy you should be using while you are in your working years and in the portfolio building phase. Additionally, your co-worker might have a higher financial risk tolerance than you. If he or she can afford to lose some money, a risky investment might work. But if you can’t afford to lose that money, it makes sense to stay away.

Rather than taking investment advice based on someone else’s financial plan, and what works for them, it’s usually a better idea to visit with a Registered Investment Advisor or a fee-only financial planner who can help you identify a course of action more likely to work for your circumstances. A third-party is usually a better help than someone you know, and whose judgment might be clouded.

Watch Out for Luck and the Market

In some cases, it’s tempting to take advice from someone you know because they have seen some success in the market, or claim to be doing well. Before you get too carried away with someone else’s portfolio, think about the circumstances surrounding the situation. Did the person just get lucky? Or is the portfolio up because the market as a whole is up?

We like to attribute our successes to our own abilities, but the reality is that there are often other forces at play, and the reality is that in many cases, it’s just luck, or the general direction of the market. If you have a good investment strategy, there’s usually not a good reason to change things up, just because someone else claims they are doing really well for the moment. In most cases, a long-term strategy that is based on the overall returns of the market over time is one that is likely to be sufficient. Don’t become so blinded by an acquaintance’s claimed genius that you give up on a solid investment plan.

In general, it’s usually better to trust to your own research, and seek the help of an investment professional if you want advice. Too often, the reality is that people you know are in the same boat as you.

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