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We'll break down the benefits, risks and how to add some of these resources to your portfolio.
Fact Checked: Cadeem Lalor
Updated: March 03, 2023
We adhere to strict standards of editorial integrity to help you make decisions with confidence. Please be aware that some (or all) products and services linked in this article are from our sponsors.
Fact Checked: Cadeem Lalor
Updated: March 03, 2023
We adhere to strict standards of editorial integrity to help you make decisions with confidence. Please be aware that some (or all) products and services linked in this article are from our sponsors.
We adhere to strict standards of editorial integrity to help you make decisions with confidence. Please be aware that some (or all) products and services linked in this article are from our sponsors.
When you think about investing in different asset classes, chances are stocks and bonds come to mind first. That’s because these traditional assets make up the bulk of many investors’ portfolios. But in a turbulent market, it’s common to see them decline in value or deliver minimal returns.
Many investors are looking to diversify their portfolios by adding alternatives such as real estate or commodities. These assets can provide some balance during tough economic times, as they typically have a low correlation with the stock and bond markets.
Despite potential benefits, some alternative investments come with unique risks. They may also not be available to everyone. If you’re thinking about adding alternative investments to your portfolio, here’s what to know.
As their name suggests, alternative investments fall outside traditional asset classes. They include things like private equity, hedge funds, real estate, art, wine, and more. These investments generally aren’t available on public exchanges. Unlike stocks, many alternative investments are also not regulated by the U.S. Securities and Exchange Commission (SEC.)
Because alternative investments aren’t under the purview of the SEC, certain ones may only be available to institutional or high-net-worth investors with accredited status. To qualify as an accredited investor, you’ll need a net worth of over $1 million or an income of $200,000 as an individual, or $300,000 as a family. You may also be eligible if you meet certain professional criteria, such as being a registered investment advisor.
Alternative investments not only offer diversification, but they may provide higher returns than traditional investments. Of course, your returns will vary depending on your investment choices, market conditions, and other factors.
Here’s a look at how certain traditional investments performed relative to some alternative investments over a five-year time period, from 2017 to 2022. This data is provided by Brent Weiss, co-founder of Facet Wealth, and Bloomberg Terminal. It includes returns on investments held from Dec. 31, 2017 to Dec. 30, 2022.
Unlike stocks, which are traded on a public exchange, alternative investments aren’t necessarily publicly-traded. If you’re interested in these assets, you may need to purchase them through a private firm or money manager.
That said, alternative investment funds may be offered through online brokerages or other platforms. For instance, you could purchase shares of a gold exchange-traded fund (ETF) or alternative mutual fund through a broker. You could also buy cryptocurrency online through a crypto exchange.
Hedge funds are private funds consisting of money from a group of private investors, or limited partners. Fund managers, often called general partners, will use the pooled money to invest in everything from traditional assets like stocks to non-traditional assets like land and real estate.
These funds may rely on leveraged trading — or investing borrowed money — to try and generate large returns. Their reliance on leverage makes them a fairly high risk investment choice. Generally, you need to be an accredited investor to invest in a hedge fund, though some funds may have non-accredited limited partners as well.
Equity crowdfunding is a unique type of fundraising that lets businesses raise capital without taking out loans. Startups and early stage companies often rely on equity crowdfunding to build their businesses and launch new projects.
Companies are permitted to raise up to $5 million worth of capital through equity crowdfunding in 12 months’ time. Both accredited and non-accredited investors can opt to invest through equity crowdfunding, though non-accredited investors may be subject to investment limits.
With this model, a large number of investors contribute to a business through an equity crowdfunding platform like AngelList or Fundable. In exchange for their contributions, investors receive a stake in that business. The overall equity you receive depends on how much you invest. Equity crowdfunding can be beneficial for would-be investors since they can earn a stake of a company for a fraction of the price of a traditional buyout. In some cases, you may be able to own a piece of a company for a few thousand dollars.
However, the relatively low bar to entry comes with a price (no pun intended). A 2019 study by the SEC found that 85% of crowdfunding initiatives fail. Thorough research on a company’s product and people can help to prevent a costly decision. Len Zapalowski, partner at investment bank Strategic Exits, urges any investors to think: “Why does a good company need 1,000 retail investors that each put in $5,000 when they can get $250,000 or $500,000 out of angel investors?”
Private debt investing involves purchasing debts held by private companies, most often through private debt funds. These funds may specialize in certain types of financing, such as direct lending, real estate or infrastructure.
Companies seeking to fund projects or build working capital may turn to private debt funding as an alternative to bank financing. These companies, often small- or medium-sized businesses, may not have access to traditional bank financing. Or they may need funds faster than a bank loan can provide.
This type of alternative investment has become increasingly popular because it provides investors with potentially higher yields than government-backed securities, and it has a low correlation with stock and bond markets. But you’ll typically need to be an institutional or accredited investor to purchase private debt.
Commodities are basic goods, natural materials, or agricultural products. Common commodities include coffee beans, sugar, wheat, gasoline, crude oil, copper, and other precious metals.
You can invest in commodities through futures contracts, which are speculative investments that allow you to buy an asset for a set price and sell it for a certain amount on a specific date. Commodity-focused mutual funds and ETFs are also available, or you can purchase commodities like bullion or coins directly.
While you don’t necessarily need to have accredited status to invest in commodities, they’re better suited for more experienced investors with knowledge of that market.
Gold is one of the more popular commodities among investors. You can buy gold through a few different channels, including purchasing shares of a gold ETF through an online broker, or buying bullion — or coins — directly through a trusted local dealer or an online platform like the American Precious Metals Exchange (AMPEX.)
Want to learn more about the magical world of alternative investments? Shake the sphere for eight financial facts.
For fun investment facts
Real estate is another popular alternative asset for investors who want to diversify. Traditionally, investing in real estate meant purchasing residential or commercial properties and renting them out for income. But thanks to new online platforms, real estate investors now have more options.
Of course, purchasing rental properties the old-fashioned way is still an option. But you’ll likely need to save several thousand dollars for a down payment and take out a mortgage to finance the property. You’ll also need to devote time and money to maintenance and other tenant inquiries. Despite these costs, rental properties can be a lucrative long-term investment.
Farmland is an interesting alternative to rental properties for those interested in real estate investing. You won’t need to manage an entire farm, either. Platforms like AcreTrader and FarmTogether allow accredited investors to purchase a stake in U.S. farmland.
Depending on the platform you use, you could purchase shares of a farmland-focused fund, or benefit from fractional or sole ownership of a farm. Minimum investments generally start around $15,000.
You can also start investing in real estate through a real estate investment trust (REIT). Fractional ownership is an option as well.
A REIT is a business that owns, and often operates, commercial properties. The properties may include apartments, office buildings, self-storage facilities and more. When you invest in a REIT, you can access a portion of the income these properties generate. Some REITs are available on public exchanges, while others are only accessible through private companies like Crowdstreet. You might need to be an accredited investor to invest in a private REIT, but some platforms (like Fundrise) allow everyday investors access.
Fractional ownership works differently than a REIT. Instead of investing in a company that owns real estate, you own a portion of a property itself. Platforms like Pacaso simplify the process of purchasing a fraction of a residential property. You can also opt to resell your portion for a future profit, assuming the property appreciates in value.
Whether you’re interested in artwork, wine or stamps, investing in collectibles can provide diversification and potentially higher returns than certain traditional investments. Depending on what you’d like to invest in, you could purchase collectibles through an auction or online platform specializing in your desired asset.
Investing in artwork is a popular option for those looking to diversify, and doing so can provide valuable protection against inflation. According to data from ArtPrice, a company that tracks the art market, fine art has outperformed the S&P 500 considerably since January 2000.
While you could purchase a painting or sculpture, there are other investment options as well. You could invest in art through a platform like Masterworks, which lets you invest in multimillion-dollar paintings without spending millions of dollars. You’ll need a minimum investment of $15,000 to get started. Returns will vary, but according to Masterworks, contemporary art tends to increase in value during high inflationary periods, with an average increase of 13.5%
What percentage of art collectors buy pieces with the intention of quickly selling them for profit?
Not only is it fun to drink, but it can also be a valuable investment. For example, the Liv-ex Fine Wine 1000 index, which tracks 1,000 popular wines across the globe, returned 22.28% over the past year. By comparison, the S&P 500 was down 18% during the same time period.
You can choose to buy wine directly, though the simpler and less expensive option may be investing through a platform like Vinovest. Their starter tier requires a minimum investment of just $1,000, and investors will pay an annual fee of 2.50%. Higher-tier investors benefit from annual fees as low as 1.90%.
Long regarded as a stable asset, stamps can be a smart investment if you want to diversify your portfolio. In general, rare or specialty stamps in excellent condition fetch the most value.
If you’d like to invest in stamps, you can purchase them directly through a private sale, stamp auction house, or internet dealer. To find a reputable stamp dealer, consider searching the American Philatelic Society’s member database.
Cryptocurrency is a digital asset that trades on cryptocurrency exchanges. While crypto had a rough year in 2022, Bitcoin has still generated some impressive returns over time. In the past five years, this popular cryptocurrency has increased in value by 3%. And unlike gold coins or bullion, you can store Bitcoin in a digital wallet, so you won’t need to find a place to put it.
Those interested in buying Bitcoin or another crypto asset can start by signing up for a cryptocurrency exchange. Popular exchanges include Coinbase and Gemini. Just be aware that crypto exchanges are typically unregulated, and some exchanges are more reputable and stable than others. For instance, FTX made news in 2022 for losing billions of dollars in customer assets due to fraudulent business practices.
While Bitcoin’s long-term growth may be impressive, buyers should be aware of the ebbs and flows they could face over a short period of time. Bitcoin hit an all-time high in value in November 2021, of $69,000 per unit. By January 2023 the value dropped to around $23,000. While investing in crypto could result in big returns, it’s a risky asset class, so it’s essential to do your due diligence and proceed with caution.
The content provided on Moneywise is information to help users become financially literate. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional. We make no representation or warranty of any kind, either express or implied, with respect to the data provided, the timeliness thereof, the results to be obtained by the use thereof or any other matter.
