Want to invest money somewhere that isn’t the stock market for once?
Whether it’s because you already have lots of funds in stocks or there’s some other reason why you want to avoid the stock market — we fully support your desire to diversify!
In this article, we’ll:
- Define what alternative investments can include (It’s a lot!)
- Talk about some of the reasons it might be wise to start thinking beyond the stock market
- Make sure you’re also aware of the risks
- Provide ideas on lots of alternative investments that will still generate plenty of returns outside the realm of buying market
- Show you how to get started with your alternative investments of choice
What Are Alternative Investments?
Alternative investments are just assets, or shares or tokens that represent these assets, that can’t be categorized into one of the “traditional” asset classes. Traditional assets are usually divided into three main classes: cash, stocks, or bonds.
Alternative investments, which we’ll also refer to as alternative assets and alternatives, come in a wide and growing variety. We’ll talk in more detail about some of the most common types, from real estate to collectibles to crypto, later in this article.
Here’s a brief rundown of most of the types of alternative investments the everyday investor will encounter:
- Digital properties: social media accounts, domains, etc.
- Real estate: rental properties, REITs, etc.
- Commodities: precious metals, agriculture products, etc.
- Cryptocurrencies: Bitcoin, Ethereum, etc.
- hedge funds
- Insurance products: life insurance and annuities
- Collectibles: baseball cards, antiques, wine, fine art, etc.
- Private capital and venture capital
Key Reasons to Consider Alternative Investments
There are a few strong arguments why alternative investments are something today’s DIY investors should consider injecting into their portfolios.
If you’re still pondering their efficacy, read on.
Like those who collect DVDs instead of streaming service subscriptions, some folks just have a penchant for the tangible. They want to add things to their portfolios that they can touch and understand and truly see the value of. Some alternative investments — think collectibles — are great for this.
Control is something most investors will have to learn to relinquish, as there is little that can be done to really “manage” traditional investments.
However, many alternative investments put a little bit of control back into the hands of the investor. Collectibles, digital properties, and real estate assets are all alternative investments that investors can get involved with, to manage them and even influence their value.
Participate in an Equitable Economic Movement
There’s something really cool about alternatives like cryptocurrencies, NFTs, and assets in the DeFi (aka “decentralized finance”) space. All of them represent a totally new understanding of value and how it changes hands.
All of these assets exist on blockchains, which are databases that act as digital, distributed financial ledgers of sorts. Blockchains anonymize and record transactions, providing users a way to exchange value — any time, anywhere — without the need for centralization institutions (like banks) or overseeing authorities (like the securities and exchange commission).
These digital alternative investments completely disrupt the current, traditional financial systems, making it easier to get and to use funds without a bank — and without complying to the strict rules that have made banking inequitable for many communities.
Create a Diverse Portfolio That Tends to Enjoy Higher Returns, Lower Losses
Probably one of the primary reasons why alternative investments are finally starting to hit the mainstream is that they help form portfolios that have been proven to enjoy lower losses while still generating higher returns.
How does that happen?
It’s simple — alternative assets for the most part aren’t closely correlated with the stock market, and many aren’t closely correlated with each other, either. That means that the events that rock the stock market don’t impact very many alternative asset classes. And an event that hits the value of wheat probably won’t change the value of real estate, cryptocurrency, and so on.
A diverse portfolio has lots of different, smaller levers going up and down all the time as markets fluctuate. What it doesn’t have is one giant lever that can get pushed down by a negative market event — and take forever to come back up. This is how these types of portfolios manage to generate rewards that outweigh the risks, the majority of the time.
The Traditional Approach is Failing
Data compiled by Yieldstreet has found that the 60% stock + 40% bond mix that was the gold standard for so long is failing. Returns for portfolios that rely on this investment strategy will eventually decrease by 80%. Knowing this, it’s not so hard to see why getting alternative investments into your mix sooner rather than later is a good choice.
Build a Hedge Against Inflation
In spring 2022, inflation and interest rates are hot topics — and getting hotter.
After a decade of sorta-kinda stability and numbers under 3%, at the time of this writing inflation has somewhat suddenly breached 8%.
In the investment world, an inflation hedge is a type of investment that usually maintains or increases in value over time, despite decreased purchasing power caused by rising prices brought on by inflation.
Some types of alternative assets can serve as inflation hedges. Real estate is generally a safe bet, because it tends to increase in value and is the kind of asset that isn’t going to go away — people will always have to live somewhere. Gold is another oft-used and effective example, because scarcity enables gold prices to rise as the value of USD decreases with inflation.
The Downsides of Alternative Investments
Of course, there are also some difficulties that alternative investors need to be prepared to deal with. Take note of these when deciding your investment plan.
The truth is, the more diverse your portfolio gets, the more complex it becomes to manage. It requires a fair amount of due diligence to keep up with all of your alternative investments in a way that truly results in lower risks and higher returns.
Complex doesn’t mean impossible though, and later on we’ll introduce you to a piece of personal balance sheet software that can be really helpful here.
Lacking Safety Net
Regulation is still developing in many areas where alternative investment opportunities are ripe — NFTs are a great example.
In addition, it can be hard to understand the underlying startups and teams behind some investment vehicles, and whether or not they’re legit or preparing to disappear on you tomorrow. Together, these factors mean that alternatives have a smaller “safety net” than their traditional counterparts.
Liquidity Isn’t as Certain
Alternative investment classes like art, antiques, gold, cryptocurrency, and NFTs all have their own markets where people can buy and trade. But, these markets can be fragmented and in some cases quite small. This results in there being less widespread agreement on what an asset is worth, and also means a more limited pool of buyers. This is why lots of alternative investments can be illiquid — aka less easy to offload — when compared to more conventional assets.
May Not Align With Buy-And-Hold Goals
We don’t know about you, but as investors we try to buy and hold assets when we can. Traditionally, the longer in the market, the better. However, we’re now operating in a non-traditional space and some alternative investments simply perform better using a short-selling strategy.
Generating a great return on an NFT, for example, is probably easiest by selling when it’s experienced a boost in popularity, no matter how long you’ve held it for.
If you aren’t interested in considering buying and selling assets in a shorter-than-usual time frame, choose your alternatives very carefully.
Common Types of Alternative Investments
Now that you know all about their background, benefits, and risks, let's finally dive into some of the most accessible alternative investment types you can get started with!
Real Estate Investments: Multifamily Rentals, REITs, Etc.
As we touched on above, real estate may be a worthwhile investment for its typically high liquidity and ability to hedge against inflation.
What keeps a lot of people away from this asset type is that it can be pretty pricey and require a lot of time to become a real estate investor, in the traditional sense. For those who want to spend a little less time and money, there’s another investment option. Real estate investment trusts (REITs) crowdfund the purchase of real estate using investor funding. With REITs, individual investors typically put in at least $1,000 to start, and enjoy returns commensurate with their investment amount.
Commodities: Gold, Agriculture, Etc.
It’s unlikely that commodities (oil, corn, precious metals, and tons more) are going to become shooting stars in any investment portfolios, however thanks to their low correlation with traditional assets they’re still useful for reducing volatility and riding out inflation.
Just like with real estate, you don’t even have to buy the real thing when it comes to commodities! There are different exchange-traded funds (ETFs), which are similar to mutual funds that track along with various commodities.
Because of their low correlation with traditional assets, many pro portfolio managers advise having some commodities in your portfolio.
Cryptocurrency: Bitcoin, Ethereum, Etc.
We believe that blockchain technology is here to stay, and with it some variation on the cryptocurrencies we know today. Of course there is risk due to the volatility of the market, but if you can manage the possible losses and are interested in getting involved, we recommend starting with an established coin (like Bitcoin) and a user-centric investing platform (like Coinbase).
Collectibles: Art, Wine, Antiques, Etc.
If there’s a market for it, it can be an alternative asset! There is nowhere this is more clear than when it comes to collectibles. Everything from antique jewels to baseball cards to delicious old wines can help diversify your portfolio.
The great thing here is that you can actually invest in an asset you’re interested in, making portfolio balancing a lot more fun!
Alternatives for HNWIs: Private Equity, Hedge Funds, etc.
These alternative types are more common among high-net-worth individuals (HNWIs) who are either accredited investors themselves or work with investment professionals. Either way you approach it, private equity funds, private credit, hedge funds, and the like are good for diversifying against downturns, and some investment vehicles in this realm — like private equity — even produce dividends, giving you some cash flow.
How to Add Alternative Investments to Your Portfolio
Once you’re ready to take more control over your portion, invest in an equitable financial future, safeguard against losses and inflation, and reap the other benefits of alternative investments — here’s exactly how to start investing.
1. Understand Your Goals and Risk Tolerance
Yes, new alternative assets will probably help your portfolio in various ways, but the last thing we want is for you to go headlong into a bunch of investments that actually knock your biggest personal finance goals way off course.
So, first and foremost, remember to treat these new investments like you would any other. Define your goals for each, and ensure that any new goals align with your most overarching financial and life goals. Understand whether you’ll take a long-term or short-term holding strategy. Get realistic with yourself about what your risk tolerance is this time around.
For a deeper walkthrough on all the steps to take to best utilize new — and even existing — investments, read our full guide to portfolio optimization.
2. Choose your Investment Platform
Now for the tactical: how to actually get out there and invest.
The good news is that this is actually pretty easy thanks to the many alternative investment platforms that can help you get into practically any asset type. But by the same token, that also means we can’t necessarily walk you through any one platform in this guide, as there are just so many different options.
So if you’re brand new to the game, what we encourage you to do is start with our guide 7 Best Alternative Investment Platforms for 2022. Once you’ve learned about the big platforms like DiversyFund, OpenSea, Vaulted, Coinbase, etc., you should be confident investing in any alternative asset in which you’re interested.
3. Track All Your Alternative Investments in One Place with Kubera
Obviously, alternative investments of some type are pretty much a must for modern investors.
But, like we mentioned, that makes for a whole lotta complexity to deal with in your portfolio.
Ain’t nobody got time for that.
Turn your portfolio management time into a fraction of what it is today with Kubera.
Kubera is personal balance sheet software complete with a slick and modern all-in-one wealth tracker platform. We — Hi, DIY investors just like you here! — build Kubera from the ground up to simplify the process of organizing, visualizing, and understanding diverse portfolios in an increasingly complex financial environment.
And, we did it all while making it downright delightful to use.
Seriously. Just sign up to hop right into the intuitive, spreadsheet-like interface. Organize and view your traditional and alternative investments side by side. Plus, you can even understand the return of your diverse assets with Kubera, so you can decide at a glance if it’s time to sell or to double down. That’s right, Kubera can automatically calculate ROI on your investments — all in your preferred currency.
We know your portfolio changes a lot in this day and age, which is why we also created some really great charts and a robust recap page. Kubera automatically brings together all your data to provide an easy-to-understand overview of individual assets and overall portfolio performance.
Work with a financial pro or brokerage? That’s no problem! Invite your financial advisor or wealth manager to use Kubera’s white-label solution as part of their client offering. With Kubera, they’ll be able to offer more accurate and modern service to their clientele, like you.
If you’re ready to get off the fence and dive into the wide and wonderful world of alternative assets, take a moment right now to sign up for a trial and affordable subscription.