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November 25, 2020

The 2020 Case for Alternative Assets

Alternative assets have been around for a few years, but the current market uncertainty and stock volatility has pushed them into the spotlight. Combined with bond returns and savings accounts with extremely low rates, it’s quite understandable why retail investors are more interested than ever in alternative assets. These asset types offer a way for average investors to gain diversification benefits, reduce exposure to equities, and hedge on the megatrends that are currently ruling everyone’s portfolio.

Alternative assets – for those new to the term – are asset classes outside stocks, bonds, and cash (for example real estate, commodities, private lending, and foreign currencies). These have been typically categorized as ‘untraditional’ by wealth managers and were not typically accessible to retail investors in the past. However, 2020 might be the year for alternative assets.

For those who have the money to invest in a market downturn, the current crisis is creating opportunities and innovative ways to make higher returns. This is a good time to diversify your portfolio, especially since many asset types are essentially ‘on sale.’ If you’re eligible for investing in alternative assets and you’ve confirmed that they provide value for your portfolio, going for alternative assets is a great move for 2020. In fact, some newer models for investment portfolios recommend having 15% to 35% of your portfolio in alternative assets. Here are some ways to incorporate these assets into your portfolio:

Peer-to-Peer Lending

Peer-to-peer lending, also known as P2P lending, is a relatively new way of supporting businesses while adding stable returns to your portfolio. Online P2P services can connect you to businesses, students, and other parties seeking loans. The P2P service provider takes care of analyzing potential borrowers, keeping records, getting all the paperwork together, and managing reporting. All you have to do is fund the loan.

How this works: There is no bank involved in P2P lending. Your money is typically pooled with other investors’ money, and together you make a loan to the individual asking for funds. You’ll then receive a fixed repayment each month that includes the interest you’re owed. There is usually a minimum dollar amount you are required to lend.

2020 has been especially hard on small local businesses. If you’re worried about your local businesses shutting down, it may be worthwhile to support them (while still getting a return on your money) as a small lender on a P2P platform.

Real Estate

Even if this hasn’t been the best year for you financially, you can still be a real estate investor. Using an online investment platform that focuses on real estate investment trusts (REITs) makes real estate easy and affordable. Plus, they have professional property managers so that you don’t have to stress about the responsibilities of being a landlord. In 2020, with renter relief and rent deferment programs available, buying a property and renting it out does not guarantee stable cash flows anymore.

REITs are usually low-cost, but each platform has its own fee structure and investment minimums. You’ll also find companies that only focus on a specific kind of real estate: there are healthcare REITs, storage REITs, multifamily housing REITs, and more. Check out more information here.

Bitcoin

The beginning of the pandemic drastically affected the trading price of the cryptocurrency. In one day, the price of Bitcoin collapsed by $2,000 amid the coronavirus panic. Bitcoin has since then recovered its value, although it has experienced (and continues to experience) significant volatility.

If you understand the basic mechanics of bitcoin and its potential future applications, bitcoin will be a worthwhile investment. In the future, it can serve as a hedge against other forms of currency like the USD or gold coins. Historically, technologies and innovations like Bitcoin tend to take off during market recessions. However, there is significant risk in this investment, and no one should invest in Bitcoin unless the risk/return profile matches their long-term goals

Commodities

In the space of 10 months, North America has witnessed a shortage of commodities like timber, aluminum, and yes, toilet paper. We don’t encourage retail investors to speculate on commodity prices during a pandemic, but this year has made it clear that there is definitely a space for commodities in your portfolio.

Gold, for example, used to be seen as a ‘safe haven’ asset during times of market volatility. It has traditionally been less volatile than the stock market and moves inversely to trends in the US dollar. However, gold, like many other assets, has increased steadily over the last ten years and may be much more closely linked to the stock market than it was in the past.

The Takeaway

Alternative investments can be extremely valuable additions to a retail investor’s portfolio. However, investors do have to proceed with caution. In addition to taking on a lot more risk, investors are also making their portfolio illiquid (not easily convertible to cash) for a few years. Every investment decision has to be made by balancing its benefits and returns against its long-term impact. Would you buy a property without carefully analyzing your ability to make payments for 15-30 years?

With the proper research, however, there is no reason that eligible investors should shy away from alternative investments. Given the feverishly high stock valuations in the S&P 500, and extremely low rates offered by bonds, adding alternative investments to your portfolio in 2020 just makes sense.

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