You didn’t have to be an investor, you just had to be alive over the last few decades to know that the stock market is far from predictable or even stable most of the time.
The bursting of the “Dotcom Bubble” saw the Nasdaq index peak and then fall more than 76% from March 2000 to October 2002 thanks to speculative investment in seemingly miraculous new “internet companies” that couldn’t deliver on outlandish expectations.
Hot on the heels of that meltdown came another — the Great Recession of 2008 — triggered by a lack of regulation in several corners of the financial industry.
And after a short but unique pandemic-driven recession in 2020, many financial forecasters believe we’re already approaching yet another downturn. This time, we’re looking at an inflation-driven recession partially induced by interest rate hikes from the Federal Reserve.
If that brief history of economic instability freaked you out a bit, we can’t blame you. But what we can do is help you improve upon one of the few elements of wealth management that you can control — how you allocate your assets to ward off loss through inevitable market fluctuations.
So let’s get started by diving a little deeper into the ins and outs of that term “diversification” that we hear so much about. Then, we’ll explore the alternative investments today’s current or aspiring high-net-worth individuals (HNWIs) can turn to in order to protect their portfolios.
Why Modern Investors Are Diversifying Into Alternative Investments
If the past 20 years have taught us anything about wealth management, it’s that absolutely no single asset class is immune to failing. That’s exactly why modern investors are looking to alternative investment sources to diversify their investment portfolios beyond simple stocks and bonds.
But what exactly does it mean to “diversify”?
Portfolio diversification is the process of investing in different types of non-stock assets (AKA alternative assets) to shield your portfolio from the losses that come with inevitable ups and downs in the stock market.
Diversification as a wealth protection strategy works because of these natural fluctuations. While every market will flex, it’s extremely unlikely they’ll all flex the same way at the same time — which puts you at less risk of experiencing dramatic losses and in a good position to catch the gains.
Which leads us to our next point: Effective diversification is done with purpose, not by throwing a dart and picking the first alternative asset you hit.
A well-diversified portfolio will contain your own unique selection of assets that align with your risk tolerance while still meeting your goals for growth. If you aren’t sure where you stand with your risk tolerance, try this quiz from Vanguard to help you decide.
Ultimately, investors who build long-term, carefully-diversified portfolios have a much easier time generating returns and riding out the losses than the high-stakes gamblers who bet all their money on a single asset and often lose big in the stock market.
That’s why so many HNWIs and even ultra HNWIs have at least 50% of their portfolios in alternative investments. All told, the value of alternative investments under management is estimated to grow to more than $17 trillion by the year 2025.
So in the next section, we’ll introduce you to today’s strongest alternative investment types to look for when building your balanced portfolio.
4 Alternative Investment Classes Modern Investors Should Consider
To put a finer point on the term before getting into the nitty-gritty, alternative investments, or alternative assets, include almost anything you can invest in that fall outside of the traditional asset classes: stocks and bonds.
The alternative investment class is expansive, and getting bigger all the time as more digital assets come to life. It can include anything from precious metals to derivatives, the exclusive private equity available to accredited investors; real estate; liquor; family heirlooms; and even digital currencies, artwork (like NFTs), and other intangible holdings.
Since there are so many types of investments in this space, in this section we’re going to focus on a narrow selection of alternative investment types that are both accessible and promising, even if it’s your first time going alternative.
Between technological developments and a growing population of adults who are more financially savvy than their predecessors, actively seeking unconventional sources of income, and excited to manage their wealth digitally; we’re witnessing the birth of a new asset class that is changing the investment world.
Digital asset investment is pivotal to a modern and diverse portfolio.
While the term “digital asset” can be used to describe digital tokens that represent traditional and even physical assets, in this case we’re talking about assets that exist only in the digital realm.
While digital assets are still a new idea for many investors, they’re just as powerful as any traditional investment asset. Just ask the Winklevoss twins — the world’s first Bitcoin billionaires.
And according to a survey of almost 800 financial professionals across the U.S. and Europe, institutional investors are very interested in digital assets.
The most popular digital asset among these investors? Bitcoin — a type of cryptocurrency.
With that in mind, let’s talk more about cryptocurrency as well as some other popular digital assets you can use to round out your modern investment portfolio.
Cryptocurrency is digital currency that is secured using cryptography and “backed” by a distributed network of computers. Its decentralized nature means it exists outside the control of any central authority, which increases its transparency but also its general instability (for now).
Cryptocurrency — often shortened to “crypto” — exists solely in the digital sphere, and it’s leading the way as far as introducing the masses to digital assets.
More than 70% of HNWIs hold cryptocurrency, Fidelity has launched a digital assets subsidiary, and investment advisory firm Cambridge Associates encouraged investors to try digital assets in their report “Cryptoassets: Venture into the Unknown.”
To get started investing in cryptocurrency, do your research and sign up with a credible exchange that enables you to create a crypto “wallet” and start buying and selling coins. But remember, as easy as it is to dive into crypto, it’s also as easy to mess it up. Learn the lingo and get a running start with our guide Investing In Cryptocurrency: The Beginner’s Guide for Late Adopters.
There are billions of websites online — which makes them a huge asset class when you think about them as an alternative investment resource for your portfolio.
If you want to invest in websites without making website management your full-time job, the best approach for you is probably buying, improving (or just holding), and “flipping” — to use real estate lingo — any type of website that generates income. Often, these include blogs, digital publications, and ecommerce stores.
To find established (and, ideally, money-making) websites that are for sale, you’ll want to look at online website marketplaces. Flippa is quite common and a good place to start.
A little more specific than websites are the domain names upon which they exist.
A domain name is a unique address people use to access a website. For example, the domain name of the website you’re on now is “kubera.com.”
To revisit the real estate metaphor, domain names are kind of like land in the fast-growing city that is the internet. As more people want their own space on the internet, the more valuable domain names become.
For investor Igal Lichtman, for example, the value of his domain names would have amounted to almost $75,000 for just a handful of some of his smartest investments — if he had properly prepared his beneficiaries to take ownership of his domains (more on that in just a bit!).
While there are several ways to generate income from building a domain portfolio — developing a website, displaying ads, etc. — the strategy that makes the most sense for someone who’s interested from an investment standpoint is again a buy/hold/sell approach.
GoDaddy, a recognized domain registrar where you can search for and purchase domain names, has a simple guide that will help you start wrapping your head around the process of buying and selling domain names for profit.
Remember that these are just some of the most popular digital assets for investors who are just diving into the alternative realm. There are plenty of other options, including trademarks, SaaS platforms, revenue-generating social media accounts, and tons more. In fact, KPMG estimates that there are more than 2,000 digital assets on the market. So if you didn’t click with any of the digital assets we discussed today, stay tuned as we cover more digital assets on our blog in the future — you’re bound to find a good fit for your portfolio.
Real estate is quite possibly one of the most popular alternative investments available today.
Not only is it an easy-to-understand asset, it also remains in high demand (hello liquidity!) and has low correlation with stocks. That means that when the stock market goes up and down, these swings don’t necessarily affect the value of real estate in the same way. So if you’re invested in real estate right alongside your stocks, you’re better prepared to ride out any downturns no matter where they happen.
Getting started with real estate can be simple — you may choose to just buy a property and hold on to it until you’re ready to sell it for a profit!
In addition, there are real estate investment trusts (REITs). These are investment vehicles into which you can invest that use investor money to purchase income-producing real estate.
Thanks to technology, there are also a lot of platforms today that enable investors to purchase just a piece of a property. Fundrise for example is a real estate platform that purchases properties via crowdfunding. The concept is somewhat like a mutual fund, but with a shorter time frame and less backing from a traditional financial management firm. With Fundrise and similar tools, everyone who invests receives payouts as that property generates revenue. With tools like this, real estate investing is available without all the painful financing processes and landlord duties!
To learn about a whole host of real estate investment platforms, read Yieldstreet vs. Fundrise: Add Real Estate to Your Portfolio.
Similar to the concept of alternative investments, “collectibles” is another one of those nebulous terms that can encompass many different things.
Think of collectible investments as almost anything that can be sold for more today than they were originally purchased for. The most common collectible categories include artwork, vehicles, antiques, coins, toys, trading cards, stamps, and books.
Some collectibles in the “luxury goods” space — think whiskey, wine, handbags, etc. — have increased in value by 100% over the last decade. There are even old stamps and coins that have gone for millions at auction.
The coolest thing about collectibles is that you don’t have to shell out a ton of money to get started. Just take your time on research and ensure you’ll be able to keep the item in pristine condition. Then, all you should have to do is wait it out and watch the value of your item grow over time!
Much like real estate, you can also invest in a portion of a more expensive collectible using a platform such as Masterworks, which is a community for investing in high-dollar art where investors receive proceeds once that artwork sells.
Private Equity and Debt (For Accredited Investors)
Private equity is acquired when investors finance private companies, AKA companies that are not publicly traded. Private equity is a great diversification vehicle and can generate powerful profits, but investors have to be careful as this space isn’t highly regulated and valuations can experience volatility as they aren’t influenced by public markets.
On the flip side is private debt, or private credit, where investors acquire the debt of a private company. This can be a higher-yield yet lower-risk option, ideal for risk-averse or fixed-income investors.
Typically, these investments are made through funds, such as hedge funds. The catch is that hedge funds and other private investment products are only available to accredited investors. However, for most HNWIs, being recognized as an accredited investor is pretty achievable.
All you have to do is meet one of these requirements:
- Have more than two years of annual income exceeding $200K (or $300K combined with your partner)
- Have a net worth over $1M (either individually or with a partner)
- Be currently engaged as a general partner, executive officer, or director at the company in which you’d like to invest
There is no certification to “prove” you are an accredited investor. Private institutions or fund managers in charge of investment opportunities are expected to do their due diligence when determining whether or not an interested party is qualified.
How to Manage All of Your Alternative Investments
While you might be ready for alternative investments, chances are the traditional investment management tools you’re used to aren’t up for the challenge.
When you’re ready for a portfolio manager that’s made for the digital world in which we live, turn to Kubera.
Kubera is balance sheet software that brings together the ease of a spreadsheet with the power of high-tech integrations to enable you to manage and optimize every single one of your assets — from traditional investments like stocks and bonds to alternative assets like crypto, real estate, websites, collectibles, private market investments, and more. Check out all the financial institutions to which Kubera connects here.
Cryptocurrency and stock investors will especially enjoy Kubera’s tickers that enable you to keep an eye on the market right from your dashboard.
And those with investments in real estate, vehicles, or web domains can take advantage of Kubera’s integrations with leading asset experts (such as Zillow in the U.S.) to feed their dashboard with real-time market data about their investments.
Of course it doesn’t end at just visualizing your portfolio. With Kubera you can also find the return every single one of your investments is generating.
Kubera automatically calculates internal rate of return (IRR), which is like ROI but with more detail. All the platform needs is info on the original purchase price, current value, cash in/cash out, and holding time. We’ll crunch the numbers and show you what kind of return your investment is generating — as well as benchmarks from some other leading indices and tickers so you can see for yourself if you’re meeting your investment objectives or are ready to make your next move.
Read How and Why to Find IRR for Investments to learn more about IRR and how Kubera works with this valuable metric.
Speaking of performance, Kubera provides yet another screen to help you understand exactly how your investment decisions are holding up.
Our recap screen takes all the data you’ve provided to Kubera and organizes it into an easy-to-digest view. See how your net worth and each asset has changed daily, weekly, monthly, quarterly, and even yearly.
Finally, Kubera’s beneficiary management feature also empowers investors to create a secure and streamlined path for passing their investment portfolio down to a predetermined heir when the time comes. No more lost domain names or crypto wallets here!
Kubera is the only wealth management solution that has all the features necessary to help current and soon-to-be HNWIs build and track diverse portfolios.
Sign up for your Kubera subscription today. And don’t forget to also check out our white-label solution that enables you to either work with Kubera as an investment professional or with the help of your financial advisor.