Alternative investments offer investors the opportunity to diversify their portfolios beyond the traditional realms of stocks and bonds. These investments include a variety of asset types, such as real estate, commodities, hedge funds, private equity, and even unique items like art, coins, or wine. By tapping into alternative investments, investors can gain access to opportunities that may offer higher returns, lower correlation with traditional assets, and additional protection from market volatility and inflation. This blog will explore the different types of alternative investments, their potential benefits, and how they can help build a more resilient portfolio.
What are alternative investments?
Alternative investments are investments that take one beyond the regular portfolio of stocks and bonds. These include a whole host of assets, ranging from real estate to commodities, hedge funds, private equity, and venture capital.
Other alternative investments also involve very unique assets, such as art, coins, and wine. These other investment types can give an even wider diversification of the investor's holdings and build toward a greater portfolio net worth with some benefits not necessarily available through traditional investment vehicles.
Why consider alternative investments?
Some benefits of considering alternative investments in the U.S. include enhanced portfolio diversification and potentially better overall returns. They might be worthy of consideration for these reasons:
Diversification: Alternative investments generally have a low or negative correlation with traditional assets, like stocks and bonds. Hence, this would also help in the very reduction of risk and volatility in a portfolio through diversification across asset classes.
Higher Return Potential: Most alternative investments, like private equity or venture capital, have the potential for higher returns as compared to traditional investments. They can grant access to high-growth opportunities that may not be available through public markets.
Protection from Inflation: Some of these alternatives act as protection against inflation, thereby including real estate and commodities. Provided the prices increase, these assets would appreciate by a better value, which aids in retaining purchasing power.
Unique opportunities: These could be access to unique opportunities that are otherwise inaccessible within ordinary investment vehicles, like investing in a startup, hedge fund, or even some rare collectibles like art or wine.
Low correlation with the market: Alternatives might work differently from traditional investments during times of high volatility. For instance, assets such as gold or fine art could be kept or appreciated in value when markets turn poor.
Portfolio Resilience: Adding alternatives increases a portfolio's resilience by bringing in stability across different market conditions and reduces overall risk of an investment portfolio.
Different types of alternative investments
Real Estate:
Direct Real Estate Investment: Concerns the direct buying of physical properties, which can be residential, commercial, or industrial real estate.
Real Estate Investment Trusts: Publicly traded companies that own, operate, or finance income-producing real estate. Investors may purchase shares in such companies to achieve exposure to real estate markets without directly owning property.
To learn more about Real Estate Investment Trusts, click here.
Private Equity:
Venture Capital: Early-stage, high-growth companies invest here. Investors put in capital against equity, expecting colossal returns if the company is successful.
Buyouts: Includes buying mature companies and making restructuring plans for the purpose of enhancing efficiency and, subsequently, selling them for profit.
Hedge Funds:
Pooled investment funds that could use any number of various strategies to deliver high returns, inclusive of long-short equity, market neutral, or event-driven. Hedge funds tend to cater more toward accredited investors because their risks and complexities are higher.
Commodities:
Physical Commodities: Money is invested directly in physical, actual commodities: gold, silver, oil, agricultural products, etc.
Commodity Funds: These funds invest in a broad array of different commodities or commodity-related securities. It gives broad exposure to commodities in a diversified manner.
Cryptocurrencies:
Virtual currencies are cryptocurrencies including the likes of bitcoin and ethereum, among others, that operate on technology involving decentralized transactions. Cryptocurrencies are thus very susceptible to high levels of volatility, indicating similar high returns.
Collectibles:
For example, tangible assets such as art, antiques, rare coins, wine, and classic cars, among other types, which usually need specialized knowledge in the valuation of these types of investments, given their rare nature and desirability.
Peer-to-Peer Lending:
Web-based platforms provide access to borrowers, and the borrowers, in exchange, let the investors earn interest by loaning out money to other human beings directly. This investment does pay out higher returns on an investment made than otherwise feasible just by maintaining a standard savings account.
These alternative investments are ways to diversify a portfolio in securities other than the traditional set of stocks and bonds. Each of these has its own peculiar risks and rewards, thus making them suitable for investors looking to explore some new non-traditional avenue for growth or income.
Strategies for Incorporating Alternative Investments
In investing in alternatives, there is the key consideration of financial goals and tolerance against various risks. This helps identify the kind of investment to make and how the investment will fit into your portfolio. On the general side, financial advisors often recommend that alternative investments make up a smaller part of your portfolio, particularly if you're just starting out or prefer taking less risk in your investments.
Here are a few tips for a beginner who wishes to diversify into alternatives:
Start with a Small Amount: Start with a small amount and gain some experience regarding market dynamics without exposing oneself to undue risk.
Research thoroughly: Each alternative investment has its own complexities. Great understanding leads to well-informed choices.
Leverage Technology: Fintech platforms make it easier for you to access a wide spectrum of alternative opportunities and manage them well.
You should include an alternative investment addition to your portfolio through proper research and gradually. This can be easily done by gaining ample knowledge about different options with unique features and risks, which will help make a well-informed decision that fits your long-term financial goals.
How to invest in alternative assets
As you can see, the universe of alternative investments is very wide and varied. The best way to learn about these assets is to first focus on the categories that interest you most and then, from there, begin your research.
Find an area that interests you. Perhaps you like collectibles but have little interest in real estate investment. Within collectibles, you may find classic cars too rich for your blood but baseball cards are not out of your league. Having isolated your interest, research that particular segment.
Similarly, if real estate interests you, ask whether you like being a landlord, house flipping, or using your brokerage account to buy an REIT.
As you think about these various alternative investments, remember to pay attention to your risk tolerance, and the liquidity along with possible return on investment. Be realistic about what kind of return you might expect, and don't let a very high outlier sway you.
Bottom line
Alternative investments present a compelling way to diversify your portfolio and explore opportunities outside the conventional stock and bond markets. While they come with unique risks and complexities, they also offer the potential for higher returns, reduced volatility, and protection from inflation. Whether you're interested in real estate, hedge funds, or collectibles, it's important to do your research, start small, and ensure these investments align with your financial goals.
For those seeking stable, income-generating options, Compound Real Estate Bonds can be an attractive addition to an alternative investment strategy. Offering an 8.5% APY, no fees, and the ability to withdraw anytime, these bonds provide a reliable way to earn passive income while diversifying your portfolio. As you explore the world of alternative investments, consider how Compound Real Estate Bonds can complement your overall strategy and help you achieve long-term financial success.
