Alternative finance is big business. Over recent years, the sector has experienced serious growth, partly due to healthy investment returns compared to the low interest rates on offer from traditional avenues. Government initiatives such as the IFISA have teamed up with alternative finance providers which has gone a long way to helping investors understand the alternative market.

However, wherever you are in your investment career, how do you know which investment opportunity is right for your portfolio?

Goals and strategy

Even if you have a particular alternative investment opportunity lined up, it is vital that you understand the different opportunities available. These include, but are not limited to:

  • Peer-to-peer lending
  • B2B lending
  • Crowdfunding
  • Invoice trading
  • Microfinance
  • Bonds

Having a clear goal in mind is important when planning what you want from any investment. Many investors use performance targets to keep their strategies in line with their goals.

Portfolio diversification

Generally speaking, investors tend to spread their capital across different investment opportunities. Each such opportunity will have a different level of return and risk compared to the previous and this could suit investors who would like to create a stable portfolio which could have a stronger chance of increasing in value as time progresses. Therefore, ensuring you invest in a wide variety of opportunities could be a beneficial plan for you.

Portfolio rebalancing

Even the most balanced portfolios require tweaking. Alternative finance opportunities will experience the same ups and downs as the traditional sector. Whilst an investment opportunity may have been the best fit 12 months prior, it may not be giving you the returns you wish now. Whilst closing any dead opportunities, you should also assess opportunity risks and return your portfolio to a level that is comfortable to you.

Evaluating risk

Whilst your portfolio as a whole will help you determine the best alternative opportunties for you, the primary factor most investors consider is risk. Each individual has a different comfort zone when it comes to risk and this will affect which opportunities are best suited to you.

Most alternative investments have an associated risk attached to them and some could result in your losing every penny you put in. However, others are lower in risk.

Assessing the level of risk you feel comfortable with will help you focus in on the opportunities that are best suited to your current investment criteria. You can always revisit opportunities when you carry out a portfolio rebalance.

Key takeaways

When it comes to choosing the correct alternative investment opportunity for you, it all boils down to your goals and the level of risk you are comfortable with. Generally speaking, if you have a financial goal with a long-term horizon there could be potential for a greater investment return. Some investors favour careful and thoughtful investment planning and will diversify their portfolios to suit a longer journey.

There are a number of alternative products to invest in – indeed, there is virtually something to suit every portfolio requirement – and picking the correct option for you is based upon what you want to achieve and the timeframe you are allowing for the result. There is no concrete methodology when it comes to selecting alternative investment opportunities as the landscape experiences fluctuations just like that of more traditional opportunities, but strategising as much as possible could be key to securing the most stable portfolio for you.

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