Cryptocurrency, nonfungible tokens, and marijuana stocks: Should you add alternative investments to your portfolio?
Cryptocurrency, nonfungible tokens, and marijuana stocks: Should I add alternative investments to my portfolio?
Jeff Witz, CFP
Investors often look for unique investments to boost their portfolio’s performance. As the world’s markets evolve and new technologies become essential parts of life, new investment opportunities tempt investors with the allure of getting in on “the next big thing” and earning quick and substantial returns. However, capitalizing on these types of investments requires an in-depth understanding of the product, the companies involved, and the market in which these companies operate. Substantial research is often needed to increase the probability of investment success, and even then, newly developing markets can come with substantial volatility and risk. Failure to understand the fundamentals driving these markets and the risk involved can lead to substantial losses.
Because of the risk involved with newly developing alternative investments, investors must ask themselves how much exposure they are willing to add to their portfolios. Should you put most of your retirement savings into an investment that is just as likely to drop significantly as it is to rise? Probably not. Are you just trying to have a little fun with a relatively small percentage of your investable assets? That is much easier to stomach. Overall, the decision should come down to your risk appetite and overall investment objectives.
The following alternative investments have been getting a lot of attention. (This is not an endorsement to buy or sell these investments.)
Marijuana stocks. Since 2012, when Colorado and Washington legalized marijuana, 13 other states have passed similar legislation. This has led to a wave of companies in the medical and recreational marijuana space going public, with some trading on major stock exchanges. These businesses range widely, including seed-to-sale producers, equipment distributors, and packaging and marketing companies. The success of legal marijuana on the state level has resulted in significant discussions of decriminalizing it at the federal level. Investors are attracted to the possibility of rapid expansion of an industry very much in its infancy.
Nonfungible Tokens (NFTs). A more recent phenomena, an NFT is a digital asset that exists on a blockchain, which allows anyone to verify the asset’s authenticity and ownership. Each NFT has a unique digital signature and acts as a virtual deed, conveying ownership of a digital asset. Digital assets vary widely, but commonly purchased NFTs include images, video clips, gifs, and memes. As with cryptocurrencies, the free market determines the NTFs’ value, so investors can look to purchase an NFT with a value they perceive to be low and aim to sell it in the future for a higher amount. The concept is like buying and selling art, but instead of purchasing a physical piece, an investor buys a unique digital token that conveys ownership of the digital asset.
Cryptocurrencies. There are thousands of cryptocurrencies, and the value of each is derived by the free market. This creates an investment opportunity to purchase a currency at a low perceived value and sell if the value has increased.
Other alternative investments. Although the previous 3 alternative investments have been garnering a lot of attention, investors can explore other options such as private equity or venture capital, hedge funds, managed futures, art and antiques, commodities, and derivatives contracts.
Alternative investments are not for the faint of heart. They often come with significant risk as investors try to determine their value on a local and global level. Investors need to carefully evaluate these opportunities before putting their money into them. Considerable research must be done to ensure a thorough understanding of the product, companies, and industry. Even more consideration must be given to the percentage of their portfolio an investor is willing to devote to these options. Although all investing carries risk of loss, a rule of thumb regarding alternative investments is to not put in more money than you are willing to lose.
The information in this column is designed to be authoritative. The publisher is not engaged in rendering legal, investment, or tax advice. If you would like assistance with your individual investment strategy, please email email@example.com.