Sometimes, it can pay off to think outside the investing box and put money into alternative investments.
When we think of investments, most of us immediately turn to stocks or bonds. These are the basic building blocks of most investment portfolios. Indeed, most of us consider a traditional asset allocation of stocks and bonds (start more stock-heavy when you're young and switch to bonds as you approach retirement) to be the best way to go.
Hedging against risk in a more traditional portfolio with a more traditional asset allocation usually involves using diversity and making use of low-cost mutual funds/index funds and ETFs. In fact, this is one of the best ways to start investing.
As some people learn more about money and investing, they start to wonder if some alternative investments can do just as well or better than the traditional portfolio.
What are Alternative Investments?
The definition of “alternative investments” varies according to the person you ask. For the most part, a good working definition is anything that isn't stocks or bonds. Some people lump real estate into traditional investing as well.
Once you get outside these established asset classes, you've ventured into the alternative investment space.
Alternative investments are those that fall outside these asset classes. They are investments that include items that may not be as liquid and have a value that is even more subjective than many of the more traditional asset classes. If you think the US financial system is on the verge of collapse, you might decide that hoarding pennies and nickels might be of value — in addition to investing in gold.
Other alternative investments might include:
- Commodities: Precious metals, agricultural products, and oil can all be bought and sold. You can buy them directly, as part of an ETF, or even trade futures and options contracts on them.
- Currencies (including cryptocurrencies): It's possible to buy currencies in the hope that they'll gain value relative to another currency. You can trade contracts on currencies. Cryptocurrencies also offer an interesting approach to alternative investing.
- Collectible cards: Various cards, including those related to sports, Pokemon, Magic the Gathering, and similar collectible cards can be worth something down the road to the right buyer.
- Limited edition action figures: Think about the types you had when you were a kid. My ex-husband often bought special edition Lord of the Rings action figures from different countries. He-Man and original Star Wars merchandise are considered reasonably valuable today.
- Artwork: Think about famous works of art or artwork from up-and-comers. Maybe you buy something today that becomes valuable later.
- Wine: Yes, you can buy wine as an alternative investment. There are investment-grade bottles available.
- Businesses: Investing in MLLPs and other types of businesses can be a way to add alternative investments to your portfolio. It's also possible to use crowdfunding sites to invest in small startups and local businesses in the hopes of receiving a return.
- Tax liens: There's even a way to invest in other people's property tax debt.
Where Can You Buy Alternative Investments?
There are different ways to access alternative investments. First of all, you can buy them on an investment exchange in some cases. For example, some ETFs offer exposure to commodities and currencies. You can also invest in real estate investment trusts (REITs) if you consider real estate an alternative and you don't have the capital to buy real estate outright.
Additionally, various websites allow you to invest in alternatives. For example, Masterworks helps you invest in art and Vinovest can help you buy shares in bottles of wine. Meanwhile, Rally claims to help you invest in collectibles, and Mainvest connects you with small business investments.
For most people, these websites are needed. They take valuable alternative assets and securitize them to some degree. You buy “shares” of the asset. Most of us can't just come up with hundreds of thousands of dollars (or even tens of thousands of dollars) to buy an expensive alternative asset.
To get access to the most exclusive deals, however, you need to have a lot of money and be considered an accredited investor. There are specialized brokers and facilitators for the really valuable alternatives. However, these new platforms provide a way for you to add some alternative investments to your portfolio in a practical and affordable way.
Should You Invest in Alternative Assets?
One of the issues many have with alternative investments is that it can be even more difficult to determine whether or not your investment will yield something more. Alternatives that involve precious metals have the potential to gain in value as the US dollar loses value, and many people prefer them because they are tangible.
Many alternatives are based on emotion rather than intrinsic value. Collectibles are a prime example. Unfortunately, your collection is probably not likely to be worth a lot. My ex-husband's Lord of the Rings collectibles never brought us wealth. In fact, after the divorce, he paid to store them and then eventually liquidated them. He sold them in bulk as a total lot and received much less than we paid for them.
If you invest in artwork or wine, you never know when the art market, or tastes, are going to change. You could spend money on an “emerging artist” or sink money into a particular wine harvest, only to have it all go nowhere.
Of course, if your alternative investment appreciates a great deal, it pays off big in the long run. However, you might have to wait a long time for it to pay off.
What to Consider When Using an Alternative Asset Platform
If you decide that your portfolio could use a little help from alternative investments, there are some things to consider when choosing a platform.
- Are there safeguards in place? What insurance does the platform have? Are you protected from failure? Many people thought they were in good shape with Celsius until its meltdown. With many of these alternatives, you don't know whether you're really protected.
- How liquid is your money? Many alternative investment platforms have a minimum holding period. You might not be able to sell for months or years.
- Minimum investment requirements. It's one thing to decide to risk $5 a week on an alternative investment. It's quite another to put $10,000 into a platform. Check the minimums to see if they make sense for you.
- Investment restrictions. Not everyone accesses the best deals — especially on a real estate investing platform. You might need to be an accredited investor to qualify for some assets.
- Fees. Don't forget to check the fees. Many alternative investment platforms charge high fees. There's a good chance you'll pay much higher fees than you would at a traditional stockbroker.
Even though all investments are subject to the whims of the market and investor perception, alternative investments seem to carry more risk in many ways. Before you invest in anything — especially alternative investments — make sure you can afford to lose the money you plan to invest. Take the time to understand how the investment works and what factors influence its value.