If there ever were a time to consider alternative investments as a contrast to the ups and downs of the stock market, that time is now. Investing in alternative assets can be very appealing for those interested at any time. But it rings true even more so when the stock market is on a downturn. In this post we will discuss alternative investments and their benefits, as well as some disadvantages. We will also review different forms of alternative investments, and their unique qualities for the investor.
What Are Alternative Investments?
First, the definition: alternative investments are an overarching type of investment that cannot be invested in through the stock market or 401ks. This essentially means they are anything aside from stocks, bonds, or cash assets.
Often – but certainly not always – alternative investments can have a fairly high buy-in level. And this makes them especially desirable for high net worth individuals and accredited investors. The central appeal of investing in alternative assets is to diversify your investment portfolio.
We have talked about diversification many times in previous posts, so we won’t go too far into its obvious benefits. The point is, when done right, a successfully diversified portfolio can be very effective at protecting an investor against potential hits due to market volatility.
What Are the Benefits to Alternative Investing?
Alternative investments take the idea of a diversified portfolio one step farther, though. This is because they generally are not as susceptible to drastic changes, as compared to public markets (stocks, bonds, etc). Of course, this varies greatly on the particular type of alternative investment (in private markets), which we will discuss shortly.
In addition to broadening your investment portfolio, alternative investments can be desirable for several other reasons. For one, they are far less regulated than traditional investments like stocks and bonds. Many alternative investments can also give their investor certain tax advantages. And, since the markets for certain alternative investments are lesser known, it can open the door for interested investors to take advantage of marketplace inefficiencies.
And if you have interest in sports memorabilia, or stamp collecting, for example – this can be a prime reason to invest in that area. Take advantage of your skill set if it is not a common one, as it could pay dividends.
Some Things to Consider for Alternative Investments
As with anything financial, alternative investments can come with their downside as well. Some of their disadvantages conversely relate to their benefits.
For example, while some alternative investments hold tax advantages, there are certainly some forms that could lead to tax disadvantages. A good wealth manager and advisor can help guide you safely on your investment options.
And although knowing they aren’t tied to the stock market can be good in some respects, these investments can be difficult to price and exit effectively. This can also make it difficult to predict their volatility. So, it’s true that they don’t necessarily follow the same patterns as the traditional market. However, they are certainly still subject to upturns and downturns.
One of the most common complaints about alternative investments is that they can be very pricey to invest in. This definitely has some truth in it. For high net worth individuals, the price should not be prohibitive. Yet it does mean that an investor would want to exercise good judgement and caution before putting money down.
Additionally, the lack of regulation and transparency in the alternative investment market can leave certain investments open to scams, hidden fees, and fraud, so be attentive. And even when there are no scams involved, fees and returns taken can often be lofty.
This isn’t meant to scare you away from these investments, but rather to advise you to do your research and due diligence. This article is a great starting point in feeling out what sort of alternative investment(s) is right for you. And of course, we are always available to consult.
Some Choices for Alternative Investment Opportunities
Real estate is one of the most common – and effective for returns – types of alternative investments. Even among people who are not typical investors, buying rental properties is a fairly standard investment tool.
Of course, its effectiveness can fluctuate along with the economy. We once saw it in the 2008-09 crisis and we are seeing it, to a certain degree, now. Overall, though, real estate investing is typically a wise addition to a diversified portfolio.
If you’re not interested in spending a lot of time on picking out real estate, or on being a landlord, there are several good options available. An easy option would be joining a real estate investment group and purchasing shares in an REIT (Real Estate Investment Trust). Buying into an REIT is a very popular option since you are still able to maintain liquidity when investing in real estate.
Venture Capital Investing
Another popular type of alternative investing is venture capital investing. This specific form of private equity investing has grown in both popularity and accessibility with the advent of Silicon Valley age of start-ups.
Venture capital investing is unique in that it specifically focuses on businesses in the very early stages of their development, or start-ups. Venture capital investing is typically used more by high net worth individuals, as it requires giving seed money to a venture capitalist. And they will in turn use their expertise to find companies and make deals for the investor. They will also take a percentage of the assets you’ve earned.
Angel Investing and Private Equity
An alternative to venture capital investing is angel investing. It is the same idea of investing in a start-up, but angel investing does not require the services of a venture capitalist. Rather, the investor is free to find a business to invest in via their own personal networking.
Private equity investing is in the same family. As the name implies, private equity investments are in companies that do not have public stock. They differ from venture capitalist and angel investments, though, in that the companies are not necessarily start-ups.
A good way to get involved can be working with a private equity firm to join a group of investors pooling their investment assets. However, the buy-in for this can be considerable. It is typically at least $250,000, and can even be up to $25 million. Additionally, these investments can be illiquid (inaccessible) for long periods of time.
Hedge funds are a fairly essential tool to have in your alternative investment belt. They are a good way to increase your chances of a good return on investment. By pooling money from different investors and spreading the investment dollars around in different asset classes, the chances of having a positive ROI increase.
Hedge funds have less restrictions, so they have a broader investment opportunity set.
Like some other forms of alternative investments, hedge funds tend to have a fairly steep barrier to entry. It can often be at least $500,000 to buy into a hedge fund. This entry fee, combined with their risk factor, makes them a potentially very fruitful investment opportunity. But it’s also one that you should consider heavily.
While often worthy of collecting simply for its aesthetic value, it has become an increasingly desirable form of alternative investing. Fine art was actually the top performing asset class in 2018.
Investors new to the fine art world may want to start outside of the top art galleries, the recommendation is that an investor start with a purse of around $10,000. At lesser known venues, though, you may be able to develop a fine art investment strategy with less risk involved.
Raw materials and other commodities
Other commodities can be very wise alternative investments as well. Investing in raw commodities like oil, minerals, gold, and even grains such as corn and soybeans can be quite lucrative. We would recommend going through an ETF (Exchange Traded Fund), where they will either purchase the commodities for you, or invest your money in businesses that produce the commodities.
And then of course, there are other more “fun” commodities, such as wine, jewelry, and even collectible items like coins or stamps. Wine, especially, has proven to be a very effective investment. Returns are typically between 6 and 15% annually in the long term.
The beauty of alternative investing is that there are so many options, and it might even be fun to find ones that match your interest.
Which Alternative Investment Opportunities Are Right for You?
If any of this has piqued your interest, we are happy to talk. There are so many forms of alternative investments (many that we didn’t even discuss!). To be sure, some alternative investments are not a good idea, and can even be fraudulent. Let us help you decipher how to go about these types of investments safely.
At Saddock Wealth, we bring years of wealth management experience to the table and can help guide you toward financial prosperity. Schedule a meeting here, and we’ll discuss your best options.