8 Types of Alternative Investments for Individual Investors

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Contributor, Benzinga
December 11, 2023

Interested in exploring alternative investments as a way to diversify your portfolio? Keep reading to learn more about the types of alternative investments available and how you can start investing in each. You can work outside the bounds of a hedge fund, share these ideas with your investment advisor and reshape your investment strategy.

What Are Alternative Investments?

Most people realize that investing is an important part of planning for short- and long-term financial success. Wise investing grows wealth, which leads to greater financial independence. Profits realized from smart investing can generate passive income, which can allow you to retire comfortably, retire early or both.  

Investment professionals work very hard to diversify their portfolios, and asset managers hope to diversify their holdings. But, most of these assets have unique investment objectives, require quite a bit of due diligence and provide you with investment opportunities that could stand for many years or even decades.

Many traditional and alternative investment opportunities exist to achieve these goals. Although stocks and bonds may get the lion’s share of attention in the press, alternative investments can build wealth just as effectively as the market. What is an alternative investment? An alternative investment is considered as anything besides traditional securities like stocks, bonds and mutual funds. 

Why Invest in Alternative Assets?

The farmer’s adage that says “don’t put all your eggs in one basket” applies on the farm and on Wall Street. Most farmers may specialize in 1 particular crop, but they probably farm more than just that variety. They do so because growing a single crop carries more risk than farming several.

If a farmer only grows oranges, the entire farm is tied to the price of oranges. Regardless of how well the orange orchard yields, the enterprise is never more than a winter freeze or an overabundance of oranges in the market from being wiped out. That’s why citrus farmers don’t just grow oranges but also lemons and other types of citrus. By diversifying their crops, they hedge against negative market forces or factors beyond their control.

People should invest in alternative assets for the exact same reason. Although the stock market has performed well on average over time, investors have been ruined by only investing in a single company or sector that crashed.

Institutional investors and pension funds have well-thought-out, well-executed diversification strategies. This process usually involves acquiring a mix of traditional investments, tangible assets and real property, as opposed to just investing in stocks and bonds. Fund managers who don’t diversify portfolios could almost be accused of negligence. The same thing holds true for the individual investor.

It’s possible that in 1 horrific day of trading (take Oct. 19, 1987’s Black Monday, for example), even an investor with a diverse stock portfolio could be ruined. However, the Securities and Exchange Commission is still watching, and many of these businesses have rules to follow. So, you’re not making a capital investment that’s 100% unsafe.

However, an investor with a diverse portfolio of alternative assets, including hedge funds, private equity funds, and VC investments, could be much better equipped to ride out the storm than an investor who only has stocks. No investment portfolio is complete if it’s not diversified across a number of different asset classes. That’s why making wise alternative investments is so important. 

Types of Alternative Investments

Whether you are a seasoned investor or just starting to explore different investment options, understanding these alternatives can help you make informed decisions and tailor your portfolio to meet your financial goals. Here are some of the alternative investments:

Real Estate

Real estate is historically one of the highest performing alternative assets. Ironically, although real estate is considered an alternative asset, it’s where most everyday Americans have the bulk of their wealth concentrated, especially as investment funds get more and more into real estate.

Generations of Americans built wealth with the purchase of their first home. When the federal government began subsidizing mortgages in the 1930s, the dream of land ownership stopped being a dream and became a reality. Since that time, millions of people have built a lot of wealth by just allowing their homes to appreciate. 

However, owning your own home is not the only way to invest in real estate. Now that the price of property has skyrocketed in most major metro areas, buying homes can be out of reach of many Americans. Fortunately, they can still make alternative investments in real estate by buying into real estate investments trusts (REITs). Numerous on-line platforms such as Streitwise or real estate crowdfunding sites like Groundfloor exist where people can invest in real estate for a fraction of the cost of buying a home. Best of all, many of these investments offer passive income.

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Venture Capital

One of the main laments of any small investor is that they are not able to get in early on the big bonanzas. After all, by the time companies like Meta Platforms Inc. (NASDAQ: FB) and Alphabet Inc. (NASDAQ: GOOGL) go public, a bulk of the wealth has already been made by early investors, most of whom are usually venture capitalists providing capital for business ventures. 

Alternative investment strategies, however, do not always require deep pockets. These are not investment products so much as they are opportunities on the ground floor of a company. There’s no customer support as you deal directly with the business owner, and it’s often not the best place to build a retirement account.

However, the investment process can be exciting, especially if you can work closely with the management teams of these businesses and help them grow. You have a little more control over your investment decisions, but the tax implications of these investments are much more complex.

Venture capitalists offer large sums of operating cash to new companies and startups in exchange for an equity share in those businesses. If the companies thrive, as in the cases of Google, Facebook and Amazon.com Inc. (NASDAQ: AMZN), the venture capitalists can see the value of their initial investment multiply several hundred times over.  That’s why venture capital is such a potentially lucrative alternative investment. 

However, it’s also very expensive and most small investors simply don’t have the financial muscle to become venture capitalists. A number of venture capital funds pool investor contributions to make larger investments. If those investments pay off, both the fund and its investors can reap huge profits. Best of all, equity shares in successful startups can generate passive income for the fund and its investors. The only downside here is that the volatility of venture capital means most funds are only open to accredited investors. 

Startup Crowdfunding

Startup crowdfunding is basically venture capital funding done on a smaller scale. You have a business you want to start, but it’s not a big enough idea to attract attention from venture capitalists, so you raise money from people in your personal network. The funding could come from relatives, friends or business partners. As with venture capitalists, these investors would usually be promised an equity share in your business in exchange for their contributions. 

The crowdfunding concept was pioneered on the internet by sites like Gofundme. Startup crowdfunding platforms offer both accredited and non-accredited investors the chance at early buy-ins for equity in startups. By investing with a startup platform, you can become a venture capitalist, albeit on a smaller scale. 

The potential upside of startup investing is high, but so is the risk profile. That’s why startup crowdfunding is an example of the type of alternative investment vehicle you make as a complement to your portfolio and not a “first option” for wealth building. 

Art

Everyone has heard a story about an original work of art by a master like Rembrandt or Norman Rockwell selling for millions of dollars at auction. Whether it’s statues, paintings, lithographs or photos, wealthy people have been collecting art for centuries. 

A perfect example of this kind of gain would be a painting from the late Jean-Michel Basquiat which was purchased 33 years ago for $20,900 and recently sold for over $110,000,000 at auction. That’s an appreciation rate of over 5,000%. Buying and storing individual masterpieces is hard for the everyday investor, but online investing platforms like Masterworks (which sold that Basquiat painting) allow you to buy shares of individual works of art by masters like Basquiat and Andy Warhol. Scarcity can drive up the demand for art masterpieces, which makes art a potentially attractive alternative investment. 

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Wine

The saying “in vino veritas” translates roughly to “there is truth in wine.” Thanks to the rise of cooking culture and the popularity of movies like “Sideways,” investors can potentially find strong returns in wine investing. A passion for wine investment is being fueled by both the wealthy and the average Joe. People are drinking more wine made by great winemakers globally. The finite quantity produced by top vintners shows why wine can have potential as an alternative investment. 

However, as is the case with art, purchasing and storing wine poses its own logistical challenges. The good news is that it’s now possible to buy and hold elite bottles of wine or even buy individual shares in highly sought-after bottles through online platforms such as Vinovest and Vint. These companies do the shipping and storing while you potentially collect profits. That kind of ease of operation, paired with profit potential, is precisely why wine is becoming an increasingly popular investment vehicle.

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Timepieces

Investing luxury watches, old-school pocket watches or even new timepieces is a good way to add value to your portfolio. As time passes, these pieces tend to rise in value, and a large collection could be worth quite a lot of money when you come to retire or simply pass it on to your children or grandchildren.

Try Bezel

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.

Commodities

Commodities are raw materials and consumer goods that include:

  • Precious metals (old, silver, platinum)
  • Petroleum
  • Cotton
  • Cash crops (corn, soybeans, oranges)
  • Diamonds
  • Heating oil

Over time, commodities can be a safe harbor for investors when the market declines. You may also choose to invest in real estate associated with energy like:

  • Oil and gas wells
  • Wind turbines and associated land holdings

Cryptocurrencies

Cryptocurrencies, like Bitcoin and Shiba Inu, are digital currencies. Unlike money issued by a nation state or central reserve bank, cryptocurrencies are not backed by assets like gold or sponsored by a government. In spite of this, they are growing in popularity as more businesses accept cryptocurrency as payment for services rendered. 

When it comes to cryptocurrencies, people seem to fall into 1 of 3 categories; 1 group loves them and thinks they represent the future of commerce while another group hates them and thinks it’s a pretend money wave that’s bound to crash. A third group, which is probably where most of the general public sits, still doesn’t fully understand how cryptocurrencies work and are watching it play out from the sidelines.  

Although details need to be worked out with cryptocurrencies, most notably taxation and government regulation, it’s hard to ignore cryptocurrency as an alternative investment option. In November 2021, a single Bitcoin is hovering around the $60,000 mark with a 1.2 trillion market cap.

As is the case with any new innovation or emerging market, cryptocurrencies carry risk, but that risk also offers tremendous upside as an alternative investment. While you may not want to put your whole retirement savings into cryptocurrency, it’s certainly something worth learning and looking at. 

Benzinga's Best Alternative Investment Platforms

If you're ready to take the next steps in exploring alternative investments you can check out Benzinga's list of the top alternative investment platforms.

Frequently Asked Questions

Q

Are alternative investments profitable?

A

Alternative investments can be profitable, but they might not be as profitable as others or may present certain risks that no other assets would face. At the same time, alternative investments can help diversify your portfolio.

Q

Are alternative investments good for retirees?

A

Yes, retirees can use their IRA funds to buy into alternative investments, but you would need to convert your IRA to a self directed IRA and determine where you can best use those funds.

Q

Should businesses buy into alternative investments?

A

Yes, businesses can buy into alternative investments, especially as they might already hold some of these assets.

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