Unlock Wealth: Discover 7 Smart Alternative Investments to Boost Your Portfolio!
Discovering Alternative Investments: What You Should Know
Alternative investments are the unconventional heroes of the financial world. Think beyond stocks and bonds, and embrace the thrilling realm of cryptocurrency, private equity, real estate, and even art. These unique assets aren’t just a side dish; they’re the exciting new entrée your portfolio might be hungry for!
While the term “alternative investments” covers a smorgasbord of options, they often share key traits: less regulation by the U.S. Securities and Exchange Commission (SEC), potential challenges in liquidity, and a unique relationship with the stock market. In short, when the market dips, your alternative assets might just stand strong, offering a buffer against the volatility.
However, tread carefully! The thrill of alternative investments often comes with a pinch of risk. It’s wise to approach these opportunities with a discerning eye. A general tip? Consider capping your alternative investments at 10% of your overall portfolio to maintain a balanced approach.
Your Guide to Buying Alternative Investments
Investing in alternative assets can be an adventure! Whether you choose to buy the asset directly, invest in a company that focuses on these assets, or find a fund that pools them together, the options are diverse. For example, you could purchase raw gold, invest in gold mining stocks, or buy a gold ETF.
Acquiring these assets can be more complex than traditional investments. While some alternatives are available through standard brokerages, others—like futures or crypto—may require specialized accounts. From crypto exchanges to real estate crowdfunding platforms, the pathways are numerous and varied.
If you’re looking to delve into alternative investments via stocks or funds, you’ll need a
brokerage account
to get started.
Seven Alternative Investments Worth Your Attention
Let’s explore seven exhilarating alternative investments and how to tap into them.
1. Derivatives
Derivatives are investments that derive their value from an underlying asset, commodity, or index. Examples include futures and forex.
Futures
Futures
represent a commitment to buy or sell an asset at a predetermined price at a future date. Keep in mind that entering into a futures contract could mean you need to take delivery of the asset, so be prepared—no one wants a truckload of corn showing up at their doorstep!
Forex
Forex trading
involves speculating on currency fluctuations. If you believe the U.S. dollar will strengthen against the euro, you can exchange euros for dollars. Note that most traditional brokerages may not handle forex, so seek out a specialized forex broker.
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Nerdy Tip
For those new to derivatives, consider practicing with paper trading before diving into real investments. Check out brokerages offering free
paper trading accounts
for a risk-free start!
2. Digital Assets
Digital assets like cryptocurrencies and non-fungible tokens (NFTs) are shaking up the investment landscape, backed by innovative
blockchain technology
.
Cryptocurrency
Cryptocurrency
is digital currency that can serve both as a means of exchange and an investment. Coins like Bitcoin and Ethereum are leading the charge. You can buy crypto through online brokerages or exchanges, making it easier than ever to join the digital currency revolution.
For added security, consider storing your crypto in a
crypto wallet
. This method reduces risks associated with online exchanges but comes with its own set of challenges. Want to dive deeper? Check out how to
buy cryptocurrency
securely.
If you prefer less hands-on exposure, consider investing in
crypto stocks
. While not directly tied to the crypto itself, these stocks represent companies connected to the broader crypto ecosystem, such as mining operations or exchanges.
You can also delve into the world of
Bitcoin ETFs
, which track Bitcoin’s price by holding the currency itself, providing a simpler way to invest without needing to manage it directly.
NFTs
Non-fungible tokens (NFTs) allow you to own a unique digital asset, whether it’s art or a game item. While their hype has cooled since 2021, they still present interesting opportunities for collectors and investors alike.
3. Precious Metals
Gold and silver have stood the test of time as valuable investments. They’re not just shiny trinkets; they can provide a hedge against inflation in a well-rounded portfolio.
Investing in precious metals can take various forms—whether buying bullion, coins, or jewelry. While the allure of owning gold bars is enticing, storage and resale can pose unique challenges.
Brokers like
Fidelity
and
Interactive Brokers
offer the option to purchase precious metals directly, either shipping them to you or securely storing them.
4. Collectibles
From fine wines to exquisite art, investing in collectibles might sound glamorous but comes with its own challenges. Security, storage, and resale can all become hurdles, especially if you lack connections in the collector community.
5. Commodities
Commodities are physical resources like oil, gold, or agricultural products. You can invest directly in commodities or explore options like commodity futures or ETFs to gain exposure without the hassle of physical ownership.
6. Real Estate
Getting into real estate can happen in several ways—through REITs, real estate investment platforms, or by purchasing properties outright.
REITs
REITs
are akin to mutual funds but focus on real estate assets, generating income through rents. They’re a potential revenue stream for investors, and you can buy publicly traded REITs via your brokerage account just like stocks.
Real Estate Investing Platforms
Crowdfunding platforms have revolutionized how everyday investors can access real estate opportunities, allowing participation in private REITs and property investments that were once limited to accredited investors.
Actual Property
For those ready to invest significant capital, purchasing actual real estate can be rewarding. However, it comes with responsibilities, as you need to manage the property or hire someone to do it for you.
7. Private Equity
Private equity
investments come from non-public investors and are typically accessible only through private equity firms. Be mindful that these opportunities often require a high minimum investment, usually available only to accredited investors.
Pros of Alternative Investments
Diversification.
By diversifying your portfolio across different sectors and asset types, you can mitigate risks and balance out the highs and lows of the market. Alternative investments can enhance your portfolio’s diversification, especially since they often exhibit lower correlation with traditional investments.
Potential Reward.
The allure of alternative investments often lies in their potential for substantial returns. However, this comes with the caveat that timing and selection are paramount, and even seasoned investors can sometimes miss the mark.
Access.
In the past, alternative investments were often reserved for the wealthy elite. Thankfully, today’s investors have greater access to a variety of alternative assets than ever before.
Cons of Alternative Investments
High Risk.
Alternative investments generally carry a higher level of risk compared to traditional assets like stocks or bonds.
Illiquid.
Many alternative investments cannot be easily converted to cash, meaning your funds may be locked up for extended periods.
Less Regulation.
Many alternative investments fall outside the purview of the SEC, leading to potentially higher risks and less investor protection.
Storage.
Asset types like precious metals, cryptocurrencies, and collectibles introduce additional challenges related to safe storage and security.
Finding the Best Alternative Investment to Stocks
Choosing the best alternative investment depends largely on your current portfolio. For many, a well-rounded stock-based portfolio serves as a solid foundation for building wealth over time. Once you have that established, exploring alternative investments can offer exciting opportunities for diversification and potential growth.
Historically, the S&P 500 index has returned about 10% annually over the last 30 years. However, the FTSE NAREIT All Equity REITs index has averaged a 11.3% total annual return since 1972, showing the potential for real estate investments to outperform stocks.
Meanwhile, gold has seen its average closing price soar from approximately $384 per ounce in 1969 to over $2,000 in 2024. Yet, its average annual return of 6.7% over the past 30 years falls short of both the S&P 500 and REITs. Nonetheless, gold can serve as a valuable hedge against inflation.
The Bottom Line
Exploring alternative investments can be both thrilling and rewarding. They offer unique opportunities for portfolio diversification, but it’s vital to remain aware of the associated challenges and risks. If you’re intrigued, take the time to research how these assets can complement your existing investment strategy. If your portfolio is still in its infancy with more traditional assets, it might be best to focus on solidifying that foundation first.
