Alternative investments frequently surface as options for investors who are looking for ways to change their volatility exposure and potentially generate additional returns beyond holding stocks and bonds. For the right investor, alternative investments can be a compelling choice for a diversified portfolio.
What Is an Alternative Investment?
To appreciate how alternative assets are defined, you need to understand two related concepts: “asset classes” and “asset allocation.”
An asset class is a type of asset that has a certain set of characteristics. There are a handful of what can be considered “core” asset classes that someone might consider adding to their investment portfolio. They include:
- Cash and cash equivalents
In its broadest sense, an alternative investment, or alternative asset, is any type of asset that does not fall into one of these three categories. The way you divide your investments among the different kinds of assets is asset allocation.
Examples of Alternative Investments
Alternative investments you might encounter in the real world include:
- Real estate, including directly owned property, real estate limited partnerships, real estate development corporations, and real estate investment trusts (REITs)
- Master limited partnerships, which can own and operate everything from oil pipelines to theme parks
- Tax lien certificates
- Stock or membership units in a privately held business
- Commodities, including precious metals such as gold, silver, platinum, and palladium, as well as crude oil, natural gas, ethanol, corn, soybeans, wheat, cocoa, coffee, or sugar
- Mineral rights
- Intellectual property, such as copyrights, patents, and trademarks
- Privately underwritten mortgages
- Equipment leasing
- Structured settlements
- Art and collectibles
- Private equity
- Coins that have numismatic value
- Venture capital
- Peer-to-peer lending
- Hedge funds
Do Your Research
This is probably the most important tip on the list. When you’re looking for alternative investments, you must do your research and know what you’re getting into. There are a lot of scams out there, and if you’re not careful, you could lose a lot of money. Knowing as much as possible about an investment is essential before putting any money into it. The internet is an excellent resource for this; many books and articles can give you information. You can also talk to financial advisers to get their opinion.
Finding a Trusted Provider
You want to ensure you find a provider you can trust with your investments. Do your research and read reviews to understand who is out there and what they offer. It’s also important to make sure they are licensed and insured. If something goes wrong, you want to be sure you are protected. Many providers also offer a money-back guarantee, which is something to look for. Though, of course, you will want to read the fine print before investing any money.
Choosing the Right Investment
Not all alternative investments are created equal. You will want to look at things like the minimum investment, the fees, the performance, and the risk involved. According to the team behind upmarket.co, finding an investment that is a good fit for you and your goals is essential. It’s also important to remember that alternative investments are not without risk. Many of them are high risk, but that doesn’t mean you shouldn’t consider them. Just be sure to do your homework before investing. This is especially true if you are investing in something like cryptocurrency.
Create a Diversified Portfolio
Don’t put all your eggs in one basket. When you diversify your portfolio, you spread the risk around and give yourself a better chance of seeing returns. This can be done by investing in different types of assets, like stocks, bonds, precious metals, and real estate. It can also be done by investing in various industries and sectors. The key is not to put all your money in one place. Though, it’s also important not to spread yourself too thin. Invest in what you know and are comfortable with. It’s okay to have some money in a “risky” investment as long as the rest of your portfolio is stable.
Consider Your Timeframe
Before you invest, you should always consider your timeframe. Are you investing for the short-term or the long-term? This will affect the types of investments you make.
If you’re investing for the short-term, you’ll likely want to focus on investments that have the potential to generate quick profits, such as penny stocks or cryptocurrency. On the other hand, if you’re investing for the long-term, you’ll want to focus on more stable investments, such as blue chip stocks or real estate. It’s crucial to align your investment choices with your timeframe to increase your chances of success. This is one of the essential tips for finding alternative investments.
Consider the Return On Investment
One of the most important things to consider when looking for alternative investments is the return on investment (ROI). With any investment, you want to see a positive ROI; however, with alternative investments, you may look for a higher ROI than traditional investments. For example, if you’re considering investing in a new restaurant, you’ll want to research the average ROI for restaurants in your area. This will help you determine if the investment is worth the risk. It’s also important to remember that alternative investments may not have the same level of liquidity as traditional investments. This means you may not be able to access your money as quickly if you need it. The investment may be worth the risk if the ROI is high enough.
Consider Real Estate
Real estate should be one of the first places you look when alternative investments. Why? It’s a tangible asset that can appreciate, provide rental income, and offer potential tax breaks.
And there are many different types of real estate investments to choose from: residential properties like single-family homes, multifamily properties, and vacation rentals; commercial real estate like office buildings, retail space, and warehouses; and land.
To start real estate investing, you don’t need much money. You can finance a property purchase with a mortgage, which allows you to leverage your investment. And plenty of real estates crowdfunding platforms will enable you to invest in properties with as little as $500
Think Beyond Stocks And Bonds
Investors typically think of stocks and bonds when they think of investments. But there are other asset classes to consider, including:
Commodities: Commodities are natural resources like gold, silver, oil, coffee, wheat, and corn. They can be traded on commodities exchanges, and investors can buy commodities directly or invest in them indirectly through commodity-based mutual funds and exchange-traded products.
Pros and Cons of Alternative Investments
Before making alternative investments, it’s wise to be aware of their potential benefits and drawbacks.
- Possibility of tax-advantaged or sheltered cash flows
- Less-efficient markets that can lead to opportunities
- Intellectual and emotional satisfaction
- Possibility of negative tax consequences
- Lack of transparency, resulting in significant hidden risks
- More complicated investments