High-end investments arent much different than traditional investments: You invest your money in stocks or bonds or mutual funds or ETFs and make all the same decisions that an average investor does. The major difference is the amount of capital in play (usually a lot) or the risk exposure (usually very high).
High-end investing can be an almost completely different beast. Its not so much typical investing as it is trading or speculating assuming a risk with the hope of profiting from market changes.
Successfully speculating (or guessing) requires analyzing situations, predicting outcomes, and putting your money on one side of a trade based on those predictions. Speculating also involves an appreciation of the fact that you can be wrong 75 percent of the time and still be successful. High-end investing means you have to chuck all your preconceptions about buy-and-hold investing and asset allocation, and all the strategies that stock brokerages put out for the public consumption. The following sections outline the high-end investment vehicles you can find out about in this book.
Futures and options
Futures and options are complex financial instruments. Its not like investing in a mutual fund, where you mail your check and wait for quarterly statements and dividends. If you invest in futures and options contracts, you need to monitor your positions on a daily basis, often even on an hourly basis. You have to keep track of the expiration date, the premium paid, the strike price, margin requirements, and a number of other shifting variables.
That said, understanding futures and options can be very beneficial because they are powerful tools. They provide you with leverage and risk management opportunities that your average financial instruments dont offer. If you can harness the power of these instruments, you can dramatically increase your leverage and performance in the markets. Book III explains investing in futures and options.
Commodities are the raw materials humans use to create a livable world: the agricultural products, mineral ore, and energy that are the essential building blocks of the global economy. The commodities markets are broad and deep, presenting both challenges and opportunities. For example, how do you decide whether to trade crude oil or gold, sugar or palladium, natural gas or frozen concentrated orange juice, soybeans or aluminum? What about corn, feeder cattle, and silver should you trade these commodities as well? And if you do, what is the best way to invest in them? Should you go through the futures markets, through the equity markets, or buy the physical stuff (such as silver coins or gold bullion)? And do all commodities move in tandem, or do they perform independently of each other?
A lot of folks equate (incorrectly) commodities exclusively with the futures markets. There is no doubt that the two are inextricably linked: The futures markets offer a way for commercial users to hedge against commodity price risks and a means for investors and traders to profit from this price risk. But equity markets are also deeply involved in commodities, as are a number of investment vehicles, such as master limited partnerships (MLPs), exchange traded funds (ETFs), and commodity mutual funds.
Foreign currency trading
When you get involved in foreign currency trading (sometimes called forex trading), youre essentially speculating on the value of one currency versus another. You buy a currency just as youd buy an individual stock, or any other financial security, in the hope that it will make a profitable return. But the value of your security is particularly volatile because of the many factors that can affect a currencys value and the amazingly quick timeframe in which these values can change. Nevertheless, if youre an active trader looking for alternatives to trading stocks or futures, the forex market is hard to beat. Online trading innovations over the past decade have made it accessible, both technologically and financially.
Trading foreign currencies is a challenging and potentially profitable opportunity for well educated and experienced investors. If you decide to participate in the forex market, carefully consider your investment objectives, level of experience, and risk appetite. Most important, never invest money you cant afford to lose (Investing can be a type of gambling). The leveraged nature of forex trading means that any market movement will have an equally proportional effect on your deposited funds; this can work for or against you.
Hedge funds are lightly regulated private partnerships that pursue high returns through multiple strategies. A hedge fund manager may invest in almost any opportunity in the market where he or she foresees favorable risk to reward. Through hedge funds, you can get some high returns for your portfolio, if you dont mind the risk and have a lot of money to invest.
Because of the risk and the investment criteria, hedge funds arent open to most investors. In fact, to participate, you have to meet strict limits put in place by the Securities and Exchange Commission regarding your worth (a net worth of at least $1 million and/or an annual income exceeding $200,000 in each of the two most recent years).
A hedge fund differs from the so-called real money ” traditional investment accounts like mutual funds, pensions, and endowments ” because it has more freedom (read: little to no regulatory oversight) to pursue aggressive investment strategies, which can lead to huge gains or huge losses.