Alternative investments are a big part of wealth building. After all, personal finance’s importance has been touted as being related to not just managing expenses but also the management of investments and investments in alternative sources can make a huge difference. As the name implies, an alternative investment is a financial instrument that does not fit into any of the typical investment categories.
Stocks, bonds, and cash are all common types of investments, while private equity or venture capital, hedge funds, managed futures, art and antiques, commodities, and derivatives contracts are examples of alternative investments.
Real estate is frequently referred to as an “alternative investment.” Due to their complexity, lack of regulation, and high risk, most alternative investment assets are owned by institutional investors or accredited, high-net-worth individuals.
When compared to mutual funds and exchange-traded funds (ETFs), many alternative investments have large minimum investments and cost structures. In addition, these investments have fewer opportunities to provide verified performance data and market themselves to potential investors seeking different forms of wealth building.
Even though alternative assets have higher beginning minimums and upfront investment fees, transaction costs are often lower than traditional assets due to reduced turnover.
The vast majority of alternative assets, as compared to their traditional counterparts, are extremely illiquid.
Because there are fewer customers for an 80-year-old bottle of wine than for 1,000 shares of Apple Inc., investors are likely to have a far more difficult time selling it. Investors may have trouble valuing alternative investments due to the rarity of the assets and transactions involving them.
Alternative investments appeal to the personal wealth importance of some investors because they have a low connection with the stock and bond markets, which means they retain their value during market downturns.
Hard assets, such as gold, oil, and real estate, are also good inflation hedges.
Many major organizations, such as pension funds and family offices, aim to diversify their holdings in alternative investment vehicles as a result of these factors.
6 Alternative Investments For Your Portfolio
1. Farmland
Farmland is any land that has been designated for agricultural purposes in zoning rules and is especially utilized for growing crops or rearing livestock. One method for investors to profit from the rising demand for food and other important commodities is to invest in agriculture. Farmers are under increasing pressure to produce massive amounts of food to feed the world’s growing population.
Some of the methods that investors can invest in farmland as an alternative investment are listed below:
Purchase Farmland Directly
Buying property directly from the landowner or through a real estate agency is one of the simplest ways to invest in farms. It offers the investor complete control over the property, allowing them to decide what to grow and how to divide the land into distinct portions for different types of crops or cattle.
Farmland prices have risen dramatically in recent years, especially in certain parts. As such, water availability, soil type, proximity to local markets and processing industries, as well as the buildings on the site, should all be considered while purchasing farmland.
Invest In Farmland REITs
An investor who wants to invest in farmland without really owning it can buy shares in a real estate investment trust that specializes in this type of property. Farmland REITs buy enormous swaths of prime land and then rent it out to local farmers.
In various geographic locations, the corporations may purchase either already cultivated or uncultivated agricultural property.
Purchasing land in such firms allows farmers to diversify their holdings by allowing them to own stakes in many farmlands across multiple states rather than just one parcel of land. Because they can sell their shares on a public stock exchange, public farmland REITs provide investors with more liquidity.
Buy Shares In Hedge Funds
Hedge funds that invest in farmland can potentially be purchased by investors. Hedge funds have been adding farms to their investment portfolios in greater numbers in recent years.
Such investments can be utilized to protect against future inflation while also profiting from rising agricultural food costs. Investors gain from capital appreciation of rural real estate as well as a consistent income from the sale of farm produce in this fashion.
Hedge funds may purchase farmland in both the United States and other nations, and either operate the farms themselves or collaborate with local farmers to raise food on such fields.
2. Real Estate
There are many ways that real estate might enhance an investor’s risk and return profile. The bonds and stocks markets are more volatile than the real estate market. Make sure you’re ready to take on the role of a landlord before investing in rental properties.
As the landlord, you’ll be in charge of paying the mortgage, real estate taxes, and insurance, along with maintaining the property, finding tenants, and dealing with any problems.
As a landlord, you’ll need to be involved in the running of the business unless you hire someone else to do it for you.
Taking care of the property and the tenants can be a 24/7 job—and one that isn’t always pleasant—depending on your situation. However, by properly selecting your homes and tenants, you can reduce the likelihood of serious issues.
Rent collection is one method landlords use to make money. The amount of rent you can charge is determined by the location of the rental.
Even so, determining the appropriate rent can be tricky because charging too much would drive tenants away while charging too little will leave money on the table. A common strategy is to charge only enough rent to cover the costs of the property until the mortgage is paid in full.
Besides rent, landlords can also profit greatly from appreciation. You may be able to sell your property for a profit (when the time does come) or use the equity to finance your next investment if the value of your property increases.
While real estate does tend to appreciate, no assurances can be made. This is especially true during moments of high real estate market volatility, such as the current COVID-19 pandemic.
3. Private Equity And Hedge Funds
Hedge funds are investment funds that trade relatively liquid assets and use a variety of investment strategies to maximize their return on investment.
To implement their strategies, hedge fund managers might specialize in a range of talents, including long-short equities, market neutral, volatility arbitrage, and quantitative techniques.
Large institutional investors are the only ones that can invest in hedge funds, such as endowment, pension funds, and mutual funds
Broadly speaking, financial investments that aren’t publicly traded on stock exchanges like the New York Stock Exchange are known as private equity. Private equity is divided into various categories, including:
- Venture capital: which concentrates on early-stage and startup businesses.
- Growth capital: enables more established businesses to expand or restructure.
- Buyouts: in which a business or one of its divisions is bought outright.
How the investment firm and the entity that receives the funds are linked is an important aspect of private equity. If you’re a private equity firm that invests in a company, you’re likely going to get a lot more than simply money; they also provide benefits to founders such as industry experience, talent sourcing aid, and mentorship.
4. Commodities
Natural resource industries such as agriculture, oil, natural gas, and precious and industrial metals are examples of commodities.
As commodities are not affected by public equity markets, they are considered an inflation hedge. Commodities are considered an inflation hedge since they are not affected by public equity markets.
Furthermore, the value of commodities grows and falls following supply and demand — greater demand for commodities leads to higher prices and, as a result, higher profits for investors. Commodities have been traded for centuries and are not a new concept in the world of investing.
Osaka and Amsterdam, Japan, may be credited with having the first official commodities commerce in the 16th and 17th centuries, respectively. Commodity futures were first traded on the Chicago Board of Trade in the mid-19th century.
5. Cryptocurrency
If you’re considering investing in a cryptocurrency, you should be aware that the road ahead is likely to be rocky until the market matures and thus your profit varies based on your investment strategy.
You may purchase Bitcoin and other cryptocurrencies on cryptocurrency exchanges like Coinbase or Kraken.
To do so, you must first create an account with the exchange. You can also buy cryptocurrency through a brokerage account that allows such transactions. If you don’t want to register a separate account and manage a bitcoin wallet, you might be able to obtain cryptocurrency exposure through other means.
6. Collectibles
Collectibles contain a wide range of goods, including the following:
- Vintage cars
- Fine art
- Mint-condition toys
- Stamps
- Coins
- Baseball cards
When one invests in collectibles, they are to obtain and preserve these tangible assets in the hopes that the values of these collectibles will increase over time.
Although more attractive and exciting, due to the high acquisition cost, lack of dividends or other income until they’re sold, and the possibility of asset destruction if not properly stored or cared for, these investments are considered highly risky.
When investing in collectibles, the most vital attribute to have is experience; you must be a true expert to expect a return on your investment.
These are the major alternative choices when it comes to diversifying your portfolio with new investment opportunities. Be sure to always do your due diligence and seek financial advice from certified experts if you’re still unsure about your next step.
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