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Alternative investments include selling short

Radio Transcript, 2 minutes 38 seconds, for use during week of Dec. 24.

Description: Penny, Susan, and Ira discuss derivatives and collectibles.

Announcer: Invest Wisely comes to you from Iowa State University Extension through a grant from the Investor Protection Trust, providing investor education on the web at: investorprotection.org.

Ira: Penny, last time we talked we discussed alternative investments, specifically short sales and hedging.

Penny: Yes, although alternative investments are for advanced investors and people who employ investment advisors, it’s worthwhile to know what they are as you plan your own investment goals.

Susan: Are there other alternative investments we should be aware of?

Penny: You may hear or read about derivatives, which cover many types of investments.  Derivatives can take the form of contracts and are based on different types of assets.

Ira: So they’re called derivatives because they derive their value from something else?

Penny: Exactly.  The main types are futures, forwards, options and swaps.

Susan: Can you give us an example?

Penny: Derivatives might be used by a farmer to sell his crop at current prices with delivery when the crop is harvested.  This protects the farmer against a price drop but also limits gains if the price increases.

Ira: So, like short sales, derivatives can carry a large risk?

Penny: Yes. And they’re generally not recommended for small investors or those who are not well-informed. 

Susan: Are there other alternative investments we should be aware of?

Penny: Collectibles, like gold, are often touted as a great investment, but there are disadvantages.  Gold involves storage costs and doesn’t produce any income as stocks and bonds do.

Ira: What about real estate?

Penny: That also can be considered an alternate investment.  There are several ways to invest in real estate--through owning real estate, like your own home, owning rental units, or investing in real estate investment trusts.

Susan: I’ve always been told that owning your own home is a good investment.

Penny: Yes.  It can provide security and the interest paid on the mortgage is deductible on your tax return.  Rental units can also be a good investment if you can do most of the maintenance and repairs yourself.

Ira: What about the real estate investment trusts?  Are those an option for investors like me or Susan?

Penny:  Until recently many advisors did consider real estate investment trusts a good choice.  Currently, however, these REITs, as they’re called, are probably not good investments for you until the market settles down.

Susan: Thank you, Penny. This is helpful.

Penny: You’re welcome.  And remember, for more information, visit the ISU Extension website at extension.iastate.edu and look for ‘Invest Wisely.’

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Updated December 26, 2007