Alternative investments can help you diversify your portfolio and open the door to potentially higher returns and additional sources of income. But they can involve a high degree of risk compared to traditional assets, and a lack of a secondary trading market for certain assets can make them difficult to sell. So, it’s important to learn about the different types of alternative investments as well as their advantages and disadvantages.
What are alternative investments?
Alternative investments are all assets outside the traditional portfolio mix of stocks, bonds, mutual funds, exchange-traded funds (ETFs) and cash. Also called alternative assets or “alts,” these securities can help investors diversify their portfolios, manage downside risk and, with certain assets, offer protection during economic turmoil. Real estate, for example, has been known to generally hedge against inflation.
However, some alternative investments are illiquid, which can make them difficult to buy or sell. For example, you may own a rare and valuable collectible. But you need to have it appraised to discover its market value and find the right buyer willing to pay that price.
Types of alternative investments
Before you begin investing in alts, it’s important to know what’s out there. So here’s a list of popular alternative investments.
Real estate
Real estate investing isn’t limited to buying and selling physical property. While you can buy property like a multi-residential rental home to generate income, you can also invest in a real estate investment trust (REIT), which is a professionally managed portfolio that invests in income-generating property like rental homes and shopping centers. You can buy shares of a REIT through a traditional brokerage just as you would buy a stock, and as a REIT shareholder, you’d enjoy a share of the income it produces.
- Earn ongoing income and possible asset appreciation.
- Investing in physical properties can require more time with routine maintenance
Cryptocurrency
Cryptocurrency or crypto is a digital currency typically linked to a technology called blockchain. The most known types of crypto are bitcoin (BTC), ether (ETH) and Tether (USDT). While its popularity is massive, crypto investing can carry a certain degree of risk. There are more than a thousand coins out there, and you need to properly handle the volatility inherent in this market.
- The price of some cryptocurrencies, like Dogecoin, has seen growth of more than 100% in short periods.
- The crypto market has been known to experience major highs and lows, which makes them particularly volatile.
Collectibles
Collectibles can include trading cards, coins, fine art and more, and this asset’s popularity continues to grow. While a rare baseball card might just be a trading card to some, others who see its rarity or nostalgic value could view it as an investment opportunity.
But the world of collectibles may be as vast as its inherent risks. For instance, collectibles need to be kept in mint condition at all times to generate value, collectors need to beware of counterfeits and some items might rise and crash in value — think Beanie Babies. But with the emergence of platforms like Public, investing in collectibles is easier than ever and you don’t need to hold physical items.
- Collectibles come in many forms, such as trading cards, fine art and coins, and offer appreciation potential.
- Thin secondary markets can make it difficult to sell collectibles.
Private equity
A private equity fund often invests in startups and other high-growth-potential companies. But, because of the risks involved, private equity funds are generally limited to accredited investors, which are typically high-net-worth individuals. Still, some crowdfunding platforms, such as Fundrise, offer regular investors access to private equity.
- Offers an opportunity to invest in rising companies.
- Most private equity funds are limited to accredited investors.
Hedge funds
A hedge fund is a professionally managed pooled investment vehicle that often uses risky investment strategies to get above-average returns. As a hedge, these funds invest part of their assets into securities that typically move in the opposite direction of the fund’s focus to make up for losses in its core base. Hedge funds are usually limited to accredited investors.
- Offers the potential for above-average returns.
- Limited to high-net-worth investors.
Commodities
Commodities are raw materials like coffee, oil and silver. Investors can invest in these tangible assets through physical ownership, like owning gold or silver, futures contracts and stocks of commodity-producing companies. Or you can invest in ETFs or mutual funds for broad exposure to a specific commodity or industry. However, the commodities markets are highly volatile and may be affected by unforeseen factors like natural disasters or geo-political conflict.
- Commodities can provide a hedge against inflation.
- Physical ownership can come with high storage and maintenance fees.
How to invest in alternative assets
Many alternative assets such as REITs, bitcoin (BTC) or gold ETFs can be purchased through traditional brokers and alternative investing platforms. Here are some examples.
- Public. Trade crypto, royalties, fine art and collectibles like rare sneakers or 1st edition Pokemon cards.
- Interactive Brokers. Trade crypto and precious metals and invest in hedge funds.
- Fundrise. Invest in real estate, private credit and venture capital.
- Vinovest. Invest in fine wine and whiskey.
- Masterworks. Invest in fine art.
Pros and cons of alternative investments.
Investing in alternatives comes with many pros and cons. Here are some examples:
Pros
- Portfolio diversification. Beyond stocks, bonds and cash, alternative assets can hedge your portfolio against downside risk and derive alternative avenues to income.
- Hedging. Some alts, like real estate, have historically posed a hedge against inflation, while alts can generally provide a hedge against stock market volatility.
- Return potential. Alternative assets have the potential for higher returns than traditional assets.
Cons
- Riskier than traditional assets. Investing in collectibles, crypto and private equity involves a certain degree of risk. Novice investors may only want to devote a small portion of their portfolio to these types of investments, but it’s important to know your options.
- Illiquidity. Some alts, like collectibles, may be highly illiquid, so it could be difficult to take your money out.
- Investor limitations. Some alts, like certain private equity funds, may be limited to high-net-worth individuals.
Compare investment alternatives
Bottom line
Investing in alternative assets such as real estate, crypto and commodities can be a great way to diversify your portfolio. But you must be aware of the risks involved.
Not all brokers offer access to alternative investments, so see which of the best trading apps give you access to this growing asset class.
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