The Dow Jones, S&P 500 and Nasdaq are all getting hammered as concern about inflation drives investors to the exit doors. This kind of volatility is why investors diversify stock portfolios. However, some bear markets are so extreme that they affect almost all stock market investors. That’s why investors opt for a diversification strategy that includes alternative investments whose performances are not tied to the stock market.
Alternative investments are considered to be investments aside from securities and stocks. While investing in stocks has certainly made many people rich, wise alternative investments have just as much, if not more, potential upside. Some investors are so put off by the stock market’s volatility that they have entire portfolios of alternative investments and no stocks. While that may be an extreme reaction, times like these are a great advertisement for solid alternative investments.
Popular Alternative Investments
You can find diversity in alternative investments. Benzinga profiles some of the most popular alternative investments and how to begin building your alternative investment portfolio.
Although real estate counts as an alternative investment by definition, the irony is that investors were building wealth through land ownership before stocks were even invented. Even before there were multi-family apartments communities and industrial complexes, many people built wealth by using land they owned for agrarian or other purposes.
Real estate investing goes so far back through time that some people don’t even classify it as an alternative investment. However, for most people, real estate is the first and most popular alternative investment. Real estate’s popularity as an investment lies in its versatility.
First, real estate is a finite resource. As more real estate is bought and less is available, the only option to obtain real estate is to buy it from someone who already owns it. This limited supply of real estate creates a demand that can drive real estate’s value upwards.
Second, real estate investors can generate passive income from their property. As opposed to stocks, which you generally have to sell to capture profits, real estate investors can make money from their investment without selling it. Examples of the kind of passive income opportunities that come with real estate include:
- Multi-family rental income property
- Commercial or industrial property
- Medical property (hospitals; doctor’s office complexes)
- Storage facilities
- Parking lots
Perhaps the ultimate beauty of these passive income real estate opportunities is that they are public necessities. Regardless of how well the stock market is performing, people need places to live, shop and get medical treatment. That means landowners whose properties have these kinds of facilities will almost always have some kind of income while their property value appreciates.
How to Invest in Real Estate
The fact that real estate is almost always appreciating in value is a blessing for real estate owners but a curse for investors looking to break into the market. Real estate has always been expensive. Modern property values in places like San Francisco, Los Angeles and New York have made buying real estate almost prohibitively expensive for most investors.
Whether you buy real estate with the intention to hold it short-term and sell at a profit or to make money off the rental income, coming up with the capital to get in can be a challenge. While lending has traditionally been one avenue of funding, bank underwriting requirements often prevent banks from lending money for riskier, potentially more lucrative deals.
That’s why real estate syndication and crowdfunding has become a popular way to invest in real estate. Both these methods use combined bundles of investor capital to buy property and improve on it. Sometimes, that means building on the property or renovating an existing property. But in both cases, crowdfunding and syndication allow investors to buy equity in real estate for much less than the cost of buying it outright.
You can also invest in real estate investment trusts (REITs). These funds use investor capital to buy income-generating real estate and then sell it. Individual investors get income based on the size of their equity share. REITs can focus on one or more areas of real estate (commercial, multi-family residential, industrial), although there are some REITs such as mortgage REITs that borrow money at low rates and lend it for real estate deals.
You can find a list of Benzinga’s favorite real estate crowdfunding platforms here.
The commodities market is another popular alternative investment. Commodities are natural resources that people all over the world need every day. Most commodities are in limited supply and since everyone needs them, buying and selling commodities has historically been a popular alternative investment. A partial example of some of the world’s commodities appears below:
- Textiles (cotton, silk)
- Precious metals (gold, silver, platinum)
- Rare earth metals (zinc, cobalt, uranium)
- Cash crops (corn, soybeans, olives, fruits, vegetables)
- Meat products (pork, beef, chicken)
Although commodities are often necessities and trading them can be lucrative, they are not without risk. The commodity sector is not only a supply- and demand-based market, but it’s dependent on a lot of external factors, including climate. For example, unseasonably cold temperatures can wipe out an orange crop or a flood can wash away millions of dollars in soybeans. Events like these can leave commodities investors high and dry without much warning.
Venture Capital and Equity Crowdfunding
Venture capital and equity crowdfunding have both become popular alternative investments. Venture capital and equity crowdfunding investors put their capital behind startup companies (usually in the tech or biotech sectors) that don’t have a track record of success or collateral to secure bank loans. In exchange for taking this risk, investors get equity shares in the company for much less than the stock price at its initial public offering (IPO).
The upside of venture capital and equity crowdfunding is obvious. The opportunity to buy into a company like Amazon.com Inc. (NASDAQ: AMZN) is almost too good to resist if you have the spare capital. However the downside of venture capital or equity crowdfunding is that you’re betting on a company with no track record and is more likely to fail than succeed.
However, the advent of online investing platforms like Startengine and WeFunder has made venture capital and equity crowdfunding opportunities available to retail investors in a way that was unimaginable even 10 years ago. Investors should probably tread lightly here. Venture capital and equity crowdfunding investments should be a small part of a balanced portfolio and not something you bet the farm on.
Cryptocurrencies may be the new kid on the block when it comes to alternative investing, but there can be no denying its popularity or volatility. Cryptocurrency is a method of holding digital assets whose value is not tied to any underlying asset or controlled by any central bank (such as the Federal Reserve or European Central Bank).
When the first cryptocurrency, Bitcoin, first appeared on the market, most people were skeptical and didn’t think it would last. It’s been a little over a decade since Bitcoin made its debut, followed by a number of other coin offerings (such as Dogecoin) and many of them surged in value. However, the crypto markets have been taking quite a beating lately.
A little over six months ago, Bitcoin and Dogecoin were trading at record highs, but many of those gains have been wiped out in the last several months. By some estimates, the cryptocurrency market has lost over $300 billion since May. Additionally, the quality of your cryptocurrency is only as good as the coin you choose. Most recently, the cryptocurrency Luna, crashed to $0.
However, in spite of the losses, you’d still be in the black if you bought into Bitcoin early enough. What’s more, the value of cryptocurrency has taken hits before and bounced back. With investing, timing really is everything. The jury is still out on the long-term future of cryptocurrency, but its volatility is a quality that everyone agrees on.
Sports Collectibles and Fine Art
No one can know how many more millionaires there might be in the world if so many moms hadn’t thrown out baseball card collections after Junior went off to college. But as baby boomers and generation X’ers age, they’re increasingly using their excess income to buy sports collectibles from their childhood. A rare LeBron James rookie card is expected to sell for $6,000,000.
Game-worn jerseys from icons like Michael Jordan or Joe DiMaggio sell for six figures at auction. Investors have taken notice, and crowdfunding platforms that allow investors to buy shares of collectibles just like stocks.
Fine art has long been a source of pride for its owners, and it’s another act that investors are increasingly getting into. Platforms like Masterworks allow investors to buy shares of art from some of the world’s most famous artists, such as Banksy and Basquiat. Considering the fact that many of the world’s most valuable art is made by artists who are no longer living, the long-term prospects of their works appreciating in value can be intriguing.
Fine Wine and Spirits
Much like real estate, fine wine is a limited commodity, and the best vintages only go up in value as more bottles disappear off the market. Platforms like Vint have taken notice, and now investors can buy shares in their favorite wines. They can even get a few bottles along with their investments, and if their favorite vintage performs at auction, they will pop the cork on profits.
In addition to fine wine, the global demand for high-end spirits like Scotch is rapidly outpacing the ability of distilleries to meet it. This trend has resulted in a new market where investors can buy into limited bottlings of their favorite dram, hold them and then sell them off at a profit some years down the line. There are investment funds dedicated entirely to Scotch.
When it comes to fine wine and spirits, although the profit potential is there, this is not necessarily an alternative investment for everyone. It’s a great way to diversify a small percentage of your portfolio, but maybe not what you should be betting your retirement fund on. While it’s certainly neat to own shares of several thousand barrels of your favorite wine or Scotch, you should only consider doing so if the rest of your portfolio is already well diversified, healthy and performing.
The Best of all Worlds?
If you were thinking of getting into alternative investments but couldn’t choose between real estate, collectibles, wine, art and your favorite cryptocurrency, you may not have to. One fund that will let you do it all at the same time; and for a reasonable buy-in of only $1,000. Hedonova is a highly diversified mutual fund that is spread across a full range of alternative investments.
The advantage is that all the offerings in the fund are pre-selected, verified for authenticity and vetted for profitability by a team of financial professionals. It doesn’t mean you can’t lose, but at least you will know that your equity share in an Andy Warhol painting or Michael Jordan rookie card is not invested in an elaborate fake.
What Alternative Investment is Right for me?
Perhaps the best thing about the world of alternative investing is that it includes so many options. Deciding which one is right for you will depend on a lot of different variables. The current state of your portfolio, your investment goals and your risk tolerance will all factor heavily into your decision about what alternative investment you choose and how much you invest.
That’s why it’s a good idea to sit down with a qualified financial advisor before making an investment (alternative or otherwise). Regardless of whether your chosen alternative investment is less volatile than the stock market, there is always a risk of loss. That risk is usually tied to the upside, meaning the higher risk investments have more profit potential. Only you can decide what’s right for you.
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