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 alternative investments that fall outside traditional asset classes. Alternative investments include things like private equity, hedge funds, real estate, art, wine, and more. These are investments that generally aren’t available on public exchanges.
Alternative assets can provide some balance during tough economic times, as they typically have a low correlation with the stock and bond markets.
Traditional vs. alternative investments
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.
To get started with alternative investments, there are several platforms that specialize in these assets. From fine wine and whiskey to sports cards, here are the best alternative investment platforms.
Types of alternative investments
Definitions vary slightly when it comes to what is considered a true alternative investment, but here are some popular, agreed-upon alternative investments you can consider.
- Hedge funds - private funds consisting of money from a group of private investors, or limited partners.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.
- Equity crowdfunding - A unique type of fundraising that lets businesses raise capital without taking out loans. 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.
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Private debt - Purchasing debts held by private companies, most often through private debt funds. These funds, such as peer-to-peer lending, may specialize in certain types of financing, such as direct lending, real estate or infrastructure.
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Commodities - Basic goods, natural materials, or agricultural products, such as coffee beans, sugar, wheat, gasoline, crude oil, copper, gold and other precious metals. You can invest in commodities through futures contracts - speculative investments that allow you to buy an asset for a set price and sell it for a certain amount on a specific date.
- Real estate - 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. Real estate investments can take the form of: rental properties, farmland, and REITs.
- Collectables - 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.
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Cryptocurrency - 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.
Alternative investment facts
Want to learn more about the magical world of alternative investments? Shake the sphere for eight financial facts.
For fun investment facts
How to buy alternative investments
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.
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Alternative investments FAQ
Jess is a financial writer who's been creating digital content since 2009. Before transitioning to full-time freelance writing, she was an editor at Investopedia and The Balance. Her work has been published on NextAdvisor by Time, Bankrate, Investopedia, and more. In her spare time, she enjoys gardening, spending time with family, and exploring the outdoors.
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