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.
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.
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 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.
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.
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.
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.
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.
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.
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.
Investing in alternatives comes with many pros and cons. Here are some examples:
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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