In the dynamic world of investment, one principle reigns supreme: diversification. Wise investors understand that placing all their financial eggs in one basket carries substantial risks. As such, they seek to expand their portfolios across various assets, preventing excessive vulnerability to market volatility. While traditional avenues like stocks, bonds, and cash have long been the go-to choices, astute investors are increasingly turning their attention to a realm beyond the ordinary – alternative investments.
Often depicted as a homogeneous entity, alternative investments encompass a wide range of unconventional opportunities, offering unique benefits and opportunities for portfolio augmentation. By venturing beyond the confines of traditional financial assets, investors can potentially unlock new avenues for growth and diversification. But amidst this vast array of options, it becomes crucial to identify the crème de la crème of alternative investments.
In this article, we delve into the fascinating world of alternative investments, shedding light on the most popular choices that savvy investors are embracing today.
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Understanding Alternative Investments
In finance, alternative investments stand out as a distinct category of financial assets that differ from traditional investment options like stocks, bonds, and cash. This diverse class includes private equity or venture capital, hedge funds, managed futures, art and antiques, commodities, derivatives contracts, and even real estate, which is often considered an alternative investment.
These investments are primarily sought after by institutional investors or high-net-worth individuals who meet specific criteria. Alternative investments possess unique characteristics that set them apart from traditional options.
Their intricate nature, limited regulatory oversight, and higher level of risk make them more suitable for sophisticated investors. It’s important to note that alternative investments typically require substantial initial minimum investments and may involve fee structures that exceed those of mutual funds and exchange-traded funds (ETFs).
Moreover, alternative assets face challenges in providing verifiable performance data and advertising to potential investors due to their complexity and limited data availability. However, they generally have lower turnover levels, resulting in lower transaction costs compared to conventional assets.
Liquidity is another distinguishing feature of alternative investments, and they often differ significantly from traditional assets in this aspect. Selling an 80-year-old bottle of wine, for example, is considerably more difficult than selling 1,000 shares of a widely traded company like Apple Inc., mainly due to the limited number of potential buyers.
Moreover, accurately assessing the value of alternative investments can pose difficulties because of their scarcity and limited track record in transactions. Consider, for example, a seller attempting to ascertain the worth of a 1933 Saint-Gaudens Double Eagle $20 gold coin. This particular coin is exceptionally rare, with only 11 known to exist, and due to legal restrictions, only one can be owned.
The 9 Most Popular Alternative Investments
Here, we provide an overview of some popular alternative investments that are currently available. It’s crucial to familiarize yourself with each of these choices before delving into them. Here’s the essential information you need to know.
1. Real Estate
Real estate is a widely recognized and highly favored alternative investment option. It offers the potential for steady cash flow that is directly proportional to the value of the investment. There are various avenues for real estate investments, each catering to different investment objectives.
One strategy focuses on growth by targeting rapidly appreciating property markets. Investors in this approach aim to buy and sell properties in these lucrative markets. Investment managers or individual investors often utilize funds to develop or renovate properties before selling them at a profit.
Real estate investments encompass several possibilities, including:
- Public REITs: These are publicly traded Real Estate Investment Trusts that can be purchased through ticker symbols via a brokerage account. Investors should thoroughly evaluate the financial performance and strategy of a publicly-traded REIT before making an investment decision.
- Residential or Commercial Rental Property: Investors can acquire real estate buildings and generate long-term rental income. House hacking or using platforms like Roofstock to buy turnkey properties are common entry points. Some investors opt to rehabilitate a house before renting it out.
- Private REITs: These privately-held (non-traded) REITs are funds that are not easily bought and sold. Many crowd-funded REITs fall into this category. Investors should carefully assess the strategy and liquidity options associated with this type of REIT before investing. Fundrise is a well-known example of a private REIT.
Apart from the aforementioned options, investors can explore opportunities in mobile home parks, campgrounds, shares of developments, and more.
- Learn more about how to invest in real estate
Lending, similar to real estate, is a highly popular alternative investment that focuses on generating consistent cash flow over time. Debt investing involves lending funds to individuals or entities, with the expectation of receiving loan repayments along with interest. Various avenues exist for debt investments:
- P2P Lending: Peer-to-peer lending platforms, such as Prosper, facilitate lending money directly to individuals seeking funds. Investors should exercise caution regarding potential defaults, as they can negatively impact long-term returns.
- Mortgage Debt: Investors can invest in mortgage debt by purchasing mortgage notes in default (via platforms like Paperstac) or by issuing new loans to homeowners or fix-and-flip investors. GroundFloor is an example of a platform where investors can extend loans to other investors. Mortgage debt is backed by real estate, but it still carries a certain level of risk.
- Other Options: Investors can explore additional opportunities, such as purchasing invoice debt (outstanding payments owed to a company), traditional business loans, and more.
Infrastructure investments are a subset of real estate investments that involve the ownership of specific real property assets that generate value. These assets can include oil rigs, segments of oil pipelines, cell phone towers, and more. Investors interested in infrastructure can access these opportunities through private Real Estate Investment Trusts (REITs) or by directly purchasing them via a Master Limited Partnership (MLP).
Private REITs offer investors the chance to invest in infrastructure projects, providing them with a diversified portfolio of infrastructure assets. On the other hand, MLPs enable investors to directly own a share of infrastructure projects, typically in the energy sector. These investments often offer attractive returns due to the essential nature of infrastructure assets and their potential for stable cash flows.
Investing in infrastructure can provide long-term benefits, as these assets tend to have long operational lives and can generate consistent income streams. But, before you invest, it’s key to do your homework. Take a close look at the specific project, understand the risks, and think about stuff like rules and regulations, upkeep costs, and how much people might need or want what the project offers.
- Learn more about how to invest in infrastructure
4. Private Business
Private business investments involve purchasing shares of non-traded companies, providing investors with an opportunity to participate in the growth and success of these businesses. While investing in private businesses carries inherent risks, as not all companies succeed, it also presents the potential for significant returns, particularly if the invested business experiences a substantial exit event.
Investors who have experience in growing their own companies often choose to invest in other private businesses. Apart from financial gains, these investors can leverage their expertise and serve as advisors, helping the invested business navigate challenges and achieve growth.
Private business investing encompasses various forms, such as angel investing and venture capital investments. Angel investing involves providing initial financial support to early-stage companies, while venture capital investments typically target more mature businesses with subsequent funding rounds. Platforms like SeedInvest, Mainvest, and SMBx offer opportunities for investors to explore and invest in private businesses.
Investors should conduct thorough due diligence, including evaluating the company’s business model, management team, competitive landscape, and growth potential. Understanding the risks associated with private business investments is essential, as they often lack liquidity and require a long-term investment horizon.
- Learn more about how to invest in private companies
5. Precious Metals
Precious metals, including gold, silver, platinum, and others, are valued alternative investments. They are often considered as non-correlated assets, meaning their performance may not be directly influenced by traditional financial markets, providing potential diversification benefits for investment portfolios.
Investors interested in precious metals typically prefer physical ownership of these assets rather than solely owning an exchange-traded fund (ETF) that tracks their value. Owning physical precious metals can offer a sense of security and the possibility of utilizing the investment in times of economic hardship or instability.
Investing in precious metals can be approached in different ways. Silver bullion is often considered a lower-cost option to start with, while gold and other higher-cost metals are also available for investment. Some platforms, such as those that allow buying gold through mobile apps, offer convenient options for investors to vault and trade precious metals.
When considering investing in precious metals, it’s important to assess factors like storage and insurance costs, market liquidity, and historical performance.
- Learn more about how to invest in precious metals
Cryptocurrency refers to blockchain-enabled digital tokens that can be used as a form of decentralized digital currency or a store of value. Bitcoin, the original cryptocurrency, was created with the intention of providing a stable store of value comparable to traditional precious metals like gold or silver. Its underlying technology, blockchain, promotes competition and transparency in the realm of government-backed currencies.
Cryptocurrency has gained significant popularity, and many investors buy and hold these digital assets, contributing to their price appreciation over time. However, potential investors should exercise caution due to security risks, high volatility, and the possibility of sustaining long-term losses. Thorough research and understanding of the cryptocurrency market are essential before making investment decisions.
There are loads of platforms out there for investing in cryptocurrency. These come with all kinds of helpful tools and resources that make it easier for you to invest wisely in the crypto market. Before you dive in, it’s important to check out a few things like how secure the platform is, if it follows financial regulations, if it’s easy to buy and sell (liquidity), and what other people are saying about it. Doing these checks can help you make a safe and informed investment in cryptocurrency.
- Learn more about how to invest in cryptocurrency
Commodities are tradable assets bought and sold on exchanges at predetermined prices. They encompass a variety of goods, including agricultural crops (such as wheat or corn), energy resources (particularly oil), and precious metals (as mentioned earlier). Commodities investing can be intricate, often involving participation in the futures market, where the future value of a commodity is assessed.
Contrary to the notion of physically owning large quantities of commodities, investors can engage in commodity investing digitally, acting as intermediaries in the supply and demand chain to profit from price fluctuations.
Investors can access commodities through publicly-traded mutual funds and exchange-traded funds (ETFs) specifically designed for commodity exposure. It’s important to note that commodity funds may exhibit short-term volatility, but they have historically served as decent hedges against inflation over the long run.
Investing in commodities requires a comprehensive understanding of market dynamics, supply and demand factors, global economic trends, and geopolitical influences.
- Learn more about how to invest in commodities
Farmland represents a unique alternative investment that combines elements of both real estate and commodities. Investing in farmland allows individuals to acquire physical land assets while also participating in the potential financial gains from agricultural operations and the sale of commodities produced on the land.
By owning farmland, investors can benefit from multiple income streams, including rental income from leasing the land to agricultural operators, as well as potential profits generated from the sale of crops or livestock. Farmland investments can provide stability and diversification to an investment portfolio, as they are not typically influenced by the same market factors that impact traditional financial assets.
If you’re thinking about investing in farmland, there are some key things to keep in mind. First off, it’s all about location, location, location. The quality of the soil and access to water are also important to consider. Not to mention, you need to take a close look at farming methods used in the area and the general farming market trends.
Now, don’t go into this blindly. You’ll want to do your homework or better yet, talk to a pro. Remember, like any investment, there are risks. The price of crops can go up and down, unpredictable weather can cause problems, and changes in farming laws might affect the industry.
- Learn more about how to invest in farmland
9. Art And Collectibles
Art and collectibles have long been regarded as alternative investments that can offer unique opportunities for potential financial appreciation. These assets are often challenging to value due to their uniqueness and subjective nature. The value of a piece of art or a collectible item, such as a rare sports memorabilia card, is primarily driven by demand and the willingness of collectors to pay a premium for ownership.
Historically, access to high-value art and collectibles was limited to the ultra-wealthy or those with exceptional luck in acquiring coveted items. However, advancements in financial technology have made it more accessible for small investors to participate in these markets.
Platforms like Masterworks and Collectable have emerged, offering opportunities for Main Street investors to purchase fractional ownership or shares in high-value art pieces or collectible items. These platforms enable investors to diversify their portfolios and potentially benefit from the appreciation of rare and sought-after assets.
Remember: Investing in things like art and collectibles isn’t just about liking pretty pictures or neat collectibles. It’s about truly understanding the market you’re entering, being able to discern whether an item is genuine and of high quality, and considering the factors that could influence its popularity and, consequently, its value.
Before you jump into this kind of investment, it’s super important to do your homework. You need to weigh up the risks, think about how easy it’ll be to sell your items (that’s what we mean by ‘liquidity’), consider where you’ll store everything, and look into the insurance you’ll need. Also, don’t forget about the potential costs that come with owning and selling art and collectibles.
The Bottom Line
Alternative investments are like the hidden gems of the investment world. They’re different from the usual stuff and, for a long time, people didn’t pay much attention to them. But now, thanks to the internet and other digital technologies, these special investment options are easier to find and explore than ever before.
But what makes an investment ‘alternative’? Well, it’s because they don’t play by the usual investment rules. They might not match the usual risks and returns you’d expect from traditional investments. So, if you’re thinking about diving into alternative investments, you’ve got to be a little careful. You could face challenges like not being able to sell off your investment quickly (known as lower liquidity) or possibly getting less return on your investment.
In the end, it’s up to you whether you want to add these alternative investments to your portfolio. It’s a personal decision that should be made after thinking carefully about your financial goals, how much risk you’re willing to take, and your overall investment plan. Before making a decision, make sure you know about each alternative investment’s unique features and possible risks. If you’re ready to go, check out our list of the best alternative investment platforms.