For the most part, new investors should steer clear of anything other than
the securities discussed in the preceding pages. Once you dip your toe into
the market, you might hear about other investment options, including the
following:
Commodity futures. Nearly 100 commodities trade on markets
worldwide. They include natural resources such as oil, metals, and
lumber as well as agricultural goods such as corn, soybeans, and cattle.
Investors can gain commodity exposure by purchasing stock in
companies that deal in those commodities, or they can invest directly
via a futures contract. Futures contracts allow investors to buy or sell
commodities and other assets for predetermined prices in the future.
Options. These derivatives allow stock or ETF investors to bet on
whether shares will rise or fall without buying the shares themselves.
Suppose a stock trades for $50 per share. If you believe the shares will
rise, you might purchase a call option that gives you the right to
purchase the shares at $55. When the stock tops $55, you can either
purchase the stock at a discount or sell the call option at a profit. Put
options allow similar bets to the downside.
Hedge funds. These entities pool investor money like mutual funds do,
but they tend to pursue unusual or esoteric strategies. Hedge funds,
lightly regulated and often secretive, frequently take on massive risks.
Precious metals. Investors purchase precious metals as a hedge
against inflation, or as a backstop to protect wealth against a
catastrophe, assuming that when disaster wracks the financial markets,
metals such as gold will retain their value.
Collectibles. While investors can make money in collectibles, most lack
the market expertise to profit consistently.
Real estate. The only exception to this book’s “avoid alternative assets”
rule, real estate can diversify a portfolio of stocks, and it acts as a hedge
against inflation, tending to rise in value during periods when inflation
erodes the price of financial assets. However, if you already own a
home, you probably have enough exposure to real estate. Of course,
plenty of investors appreciate the inflation protection and total-return
potential of real estate and would like to buy in. However, because
pieces of real estate cost so much, few individuals have the funds to
directly invest in property beyond their personal residences. You can’t
buy shares of a piece of property on a public market. If you seek real
estate exposure, consider real estate investment trusts (REITs). These
companies buy, sell, and manage real estate, and their trust units trade
on exchanges like stocks.
Alternative Assets.
