The investment world is full of different options. Whether this is your first time creating diversification in your portfolio, or you are wanting to add something different to your strategy, alternatives are a great way to protect and build your wealth.
Alternative investing is an investment strategy that’s been used by the 1% for a long time. This category of investing was typically only open to those meeting minimum net worth requirements and with high investment minimums. However, in recent years with changes in regulations and technology enabling easier access to investment opportunities, many different types of alternative investments are opening up to the everyday investor.
Here are 5 of the most popular alternative investments for investors who are new to the category, ranked by general risk level (however, note that the risk level of any specific investment varies greatly).
1. Real Estate
Real estate is a common and preferred investment for the wealthy and institutions. There are many different ways to invest in real estate and watch the property appreciate.
Here’s a quick breakdown:
Residential real estate: Residential real estate is a place where someone lives, like a studio, condo, house, or vacation rental. If you own residential real estate and rent it out, you can make money through monthly rents and the appreciation of your property over time. Many people go into the business of house flipping where they buy low, renovate, and sell the property for a higher price.
Commercial real estate: This category includes businesses, malls, large-scale apartment buildings, and warehouses. If you own a piece of commercial real estate you have the opportunity to lease out your space and the owner of the business would pay you rent. In general, you can receive much more in monthly rent with a commercial real estate property versus a residential property.
Land: You can invest in a plot of land and build. Depending on where you purchase land, there may be restrictions on what you can develop. Buying land typically involves a heavy amount of research and deep capital to cover the costs of building something entirely new. In addition, you need to become fluent in things like zoning and building codes to have your plans approved by the district in which you are building.
For the everyday investor, the main way to invest in real estate is either by:
- purchasing a residence of their own to live or to rent out
- investing in shares of real estate properties through funds commonly known as REITs
A real estate investment trust (“REIT”) is a company that owns and operates large-scale, income-generating real estate. Investors who want to co-own a piece of larger real estate assets can buy shares of a REIT. REITs offer investors exposure to a fund of tangible assets that diversify one’s investment portfolio.
REITs are attractive because they generally produce higher dividends than other assets. By nature, REITs perform best as part of a long-term strategy. These are preferred by people looking to maximize their long-term returns due to their lucrativeness and monthly dividend opportunities for extra income.
Traditional commodities include tangible goods like oil, gas, gold, silver, sugar, coffee, beef, and grain. Typically, these products are available in the public market in the form of ETFs, stocks, options, and mutual funds. While this category can provide potentially high returns, it does not come without high risks.
The commodities market is subject to high volatility because of the unpredictability of pandemics, climate change, and global supply and demand. Generally, commodity trading is a specialized investment strategy, so if you’re interested in exploring further it might be in your best interest to work with a financial advisor who specializes in commodity trading.
3. Peer to Peer Lending
Peer to peer lending came about in 2005 as a new alternative for people who needed to consolidate debt at a better interest rate. An applicant’s credit score determines their interest rate, and those with better credit will have lower rates while those with lower credit will be charged higher interest rates.
Several platforms offer social lending to connect borrowers directly to investors. Individuals can lend funds to borrowers who meet the designated eligibility criteria. Each platform sets the rates and terms of the lending process. The attractiveness of peer to peer lending is that investors may have a much better return on their cash savings than a bank savings account or CD offers. Peer to peer lending also allows borrowers to seek an alternative to traditional banks or a better rate than banks offer.
Collectibles are considered alternative investments because they don’t fall in the conventional categories of stocks, bonds, and cash. Family heirlooms, fine art, cars, stamps, and wine have a low correlation to the market. Collectibles are tangible and an interesting way to diversify from conventional investments into categories that have high appreciation potential.
Even during economic downturns, the market value of a collectible may hold up, making it an attractive asset. Collectibles often hold an emotional value based on nostalgia. Although it may take time to find a buyer, owning a collector’s piece can place you in a powerful trading position with anyone in the world.
If you enjoy collecting, investing in this asset class can be satisfying and keep your investments in something real. However, if you invest in a piece of art you may be stuck with it until you find a buyer. Like real estate, collectibles leverage a long-term strategy. If you’ve invested in high quality items you can expect your collection of items to appreciate in price over time.
Cryptocurrency is the new kid on the block when it comes to alternative investments. The most popular type of cryptocurrency is Bitcoin, which launched in 2009. In 2019 more than 18 million bitcoins were in circulation, totaling over $146 billion.
Although cryptocurrency continues to have a high market value, it’s a volatile investment due to the nature of digital currency
Cryptocurrency is considered one of the riskier alternatives because of its recency and volatility. The system is subject to hacks, scams, and fraud. In 2019, investors lost a combined $4 billion from cybercrime and cyberattacks. Granted, new cyber protection technology is rapidly developing, but these major risks are worth considering. Other considerations are that cryptocurrencies are used in the dark web for illegal activities and make up 76% of dark market transactions.
Cryptocurrency can be bought on different platforms such as Kraken or Coinbase, among others. Since the price of various altcoins is so low right now, a lot of investors are attracted to buying coins for long term or “hold”. The crypto market is open 24/7 so you don’t need to trade within the traditional trading hours of 9am to 1pm.
Each of these strategies can help you diversify a long-term investment portfolio. Researching what’s available and making smart decisions can help you maximize your returns and protect your assets from market volatility. During unpredictable times, many investors look to asset classes like REITs and other alternative investments to protect their hard earned assets from the market.
When investors include diverse asset classes in their portfolios, they give their money multiple degrees of protection.
Alternatives can also be a way to access higher value investments, although that may come with higher risk like we’ve seen in the case of cryptocurrency. Understanding the class of alternatives, the vehicle in which you’re investing and its level of risk is critical before getting started.
At DiversyFund, we chose multifamily real estate in the form of a real estate investment trust (REIT) as the first alternative fund we offer to the everyday investor. We selected this category specifically because it’s considered more conservative and because it’s a tangible asset, easier to navigate for those who are new to alternatives.