Every investor wants to maximize their returns and lower their risk. Portfolio diversification with alternative investments is one of the best ways to achieve both goals.
You can spread your money across various stocks, but alternative investments offer further diversification and opportunities. These investments cater to any investor. Whether you want more cash flow, significant appreciation, or minimal downside, alternative assets have something for everyone. These investments can align with your long-term financial goals and move you closer to financial freedom.
What Are Investment Alternatives?
Many people hold cash and buy stocks and bonds. These assets involve the least amount of work and are common in households. A Gallup survey revealed that 58% of Americans own stocks, while far fewer people own bonds. Some investors want more options and pursue alternative assets. These investments are any asset that isn’t a stock, bond or cash position.
Who Can Buy Alternative Investments?
Investors can select from many alternative assets, and most of these investments have no restrictions. Some of these assets are available to any investor. The Securities and Exchange Commission (SEC) restricts access to some alternative investments, such as hedge funds, to accredited investors. Anyone can purchase real estate, but you will need enough money for a down payment.
Characteristics of Alternative Assets
Investors should understand an asset before investing. Alternative assets often carry these characteristics:
- Less SEC regulation
- Less liquidity
- Higher risk
- Higher potential payoff
- Less transparency
10 Types of Alternative Investments
Alternative assets stretch across several industries and strengthen portfolio diversification. Investors can choose from these alternative investments:
Wine investing leans on the principle that wine gets better with age. You can invest in wine bottles and wait for their value to rise over time. Wine investing offers a path to short-term returns disconnected from broader market performance. This disconnect can help during recessions but hurt during bull market rallies.
Art prices don’t fluctuate too much, even in volatile markets. Some investors spend over $1 million on artwork that will maintain its value or become more valuable over time. Art has a higher barrier to entry for investors, but if you have the funds, you get a steady asset that does not get affected by the macroeconomic environment.
Investing in timepieces allows you to wear luxury on your wrist every day, build quite a collection and leverage the increasing value of a nice watch. Remember, not all watches rise in value over time, but many will. Keeping a collection is a good way to cash in in the future (or you can pass on those timepieces to your children or grandchildren.) You can buy new, or you can seek out a marketplace that allows you to buy for value while collecting some of the finest timepieces of yesteryear.
The luxury watch market has been growing of late, and Bezel allows you to enter this market without hunting in antique shops or social media marketplaces. Launched in 2022, Bezel offers a highly curated selection of luxury timepieces from household names like Cartier, Rolex, Tag Heuer, Tiffany and more.
Bezel’s mobile app is just as easy to use as its website, and the catalog appeals to both new collectors and timepiece enthusiasts or even those looking for that one special watch.
At Bezel, you gain peace of mind and get the value you deserve with:
- Digital and in-house authentication of every timepiece before it’s listed for sale
- A range of sellers from private owners to dealers and resellers
- Extraordinary customer care
- Fully insured overnight shipping
- Available warranties (for an added cost)
While Bezel is only available in the U.S., it’s the best way for you to invest in watches, add value to a diverse portfolio, adorn your wrist with some luxury, find the perfect gift or resell a watch that lost its spot in your rotation.
Cryptocurrencies are decentralized virtual currencies. Investors hope cryptocurrencies will receive widespread acceptance as a method of payment and be a viable alternative to fiat currency. Some cryptocurrencies have produced 10,000%+ gains in a few years, but the crypto market is very speculative.
Investors can buy many types of real estate. You can invest in rental properties, multifamilies, warehouses and other properties. Real estate is a tangible asset that always maintains value. People always need places to live, do business and store valuable items. Down payments and learning about each location can present a hurdle for beginners, but those barriers get easier to overcome as you raise more cash and research an area.
People also need to eat, making agriculture an optimal hedge against inflation. This asset also produces cash flow but comes with a high cost of entry and recurring expenses. Agricultural assets often remain strong during market corrections, but unfavorable weather or a bad harvest can hurt your cash flow.
Hedge funds are like mutual funds but with fewer restrictions. These funds can use derivatives, short positions and other risky strategies to increase returns and minimize the downside. Hedge funds are also less liquid. Most hedge fund managers give investors a brief window to sell assets before locking them into the hedge fund for several months. The SEC only lets accredited investors buy positions in hedge funds.
Private Equity Funds
Private equity gives you access to emerging startups. You can make a fortune on the right private equity investment, but most startups fail and turn the investment into zero. A single private equity investment that takes off can compensate for several investments that don’t pan out.
Venture Capital Funds
Venture capital funds give you exposure to early-stage companies. Venture capitalists have a long-term commitment and can make a generational return. Some venture capitalists made early investments in Facebook, Amazon, Google and other corporate behemoths.
Futures contracts allow investors to capitalize on price fluctuations in commodities. Instead of trading futures on your own, you can buy into managed futures. Professionals will allocate your funds toward futures and make decisions in your best interests.
Advantages of Alternative Investments
Adding alternative investments to your portfolio offers several advantages.
- Low Correlation: Alternative investments are less prone to macroeconomic conditions. Stocks may take a hit during economic uncertainty, but alternative investments can weather uncertainty with greater ease.
- Lower Volatility: Lower volatility leads to less stress. Emotions have less of an influence on your investing decisions, and you can stay focused on the long term.
- Diversification: Portfolio diversification shields you from excessive risk while letting you capitalize on more opportunities. Investors have different preferences regarding what they buy, but everyone seems to agree about the importance of portfolio diversification.
- Potentially Higher Returns: Alternative assets can generate higher returns than conventional assets. The higher returns can help you reach your retirement goals sooner.
- Inflation Hedges: Inflation reduces the value of money, but some assets such as food and property always maintain their value. Inflation hedges offer more stability in unstable macroeconomic environments.
Risks of Alternative Investments
Every asset has strengths and weaknesses, and alternative investments are no exception. You should weigh these risks before buying these assets.
- Lack of Transparency: Some alternative assets do not have transparency. You may invest in an asset with the wrong assumptions or without the full picture.
- Lack of Regulation: Unregulated assets carry more risks for investors. You can get scammed or put yourself in a risky position.
- Greater Risk: Not everyone wants to endure high risk for a high potential payoff. Some alternative assets produce incredible gains, but other investments can go to zero.
- High Minimum Investments: You will have to raise considerable funds for most alternative assets. A high minimum investment also makes it more difficult to diversify.
- Difficult to Value: Some alternative assets have fewer valuation metrics to help you determine fair value. Art, crypto and other assets rely heavily on public sentiment, while stocks and real estate have several valuation models to explore.
- Low Liquidity: Some investors sell their assets to cover emergency expenses and retire sooner. Unfortunately, most alternative assets have less liquidity, and it can take several months to cash out of a position. Consider how soon you will need the money before investing in alternative assets.
Diversify Your Portfolio With Alternative Investments
A diverse portfolio exposes you to more market opportunities and helps you weather downturns. Many alternative investments do not move up and down with the rest of the markets. This lack of correlation can generate high returns and improve your portfolio. Investing is the key to early retirement. Investing in alternative investments can help you reach your goals sooner.
Frequently Asked Questions
What are the safest alternative investments?
Each asset has its risks and rewards. Crypto is the most affordable and liquid alternative asset, while real estate and agriculture are inflation hedges. The safest alternative investment depends on how you define a safe investment.
What type of investment is best for beginners?
The best investment for beginners depends on your available capital, income and preferences. It’s better to make initial mistakes with a small amount of money than a significant portion of your life’s savings.
How can I start investing with little money?
You can buy fractional shares and search for affordable assets.