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- Alternatively, alternative investing can be an excellent way to diversify your portfolio and potentially earn higher returns, as it’s less correlated with traditional stocks and bonds. This includes investments in commodities, real estate, cryptocurrencies, art, wine, and more. In the past, only wealthy, accredited investors had access to these opportunities, but now, anyone can invest through crowdfunding platforms and funds. While alternative investments offer greater diversification and the potential for higher returns, some may not be easy to liquidate quickly. If you’re interested in alternative investing, keep reading for a comprehensive guide on how to get started.
What Is Alternative Investing?
Interest in alternative investing has grown significantly since the 2008 recession, when traditional markets like stocks and bonds took a downturn. Investors sought options that didn’t follow the same trends as these markets. Alternative investments gain more traction when stock and bond markets are unstable or weak.
These investments encompass assets outside the typical stock and bond markets. Previously, they were only accessible to the wealthy, but now, smaller investors have opportunities to participate as well.
Some examples of alternative investment options include:
- Investing in gold and silver.
- Investing in art.
- Investing in wine.
- Investing in real estate.
- Investing in hedge funds.
- Investing in private companies.
- Investing in digital currency.
- Investing in private loans and loans to companies facing financial difficulties.
Younger investors, particularly Millennials, are increasingly drawn to alternative investments, especially as celebrities like Matt Damon and Reese Witherspoon highlight their benefits. You can explore alternative investments through crowdfunding apps like Fundrise and Crowdstreet. Additionally, private funds, publicly traded real estate investment trusts (REITs), and managed ETFs provide other avenues for investing in alternatives.
Alternative Investments vs Stocks
Many investors are familiar with the potential returns from investing in individual stocks, stock market ETFs, and mutual funds. Over the past century, the U.S. stock market has delivered an average annual return of over 9%. However, there have been years with significant losses, such as the -18.01% decline in 2022 and the -36.55% crash in 2008.
Investing in the stock market offers strong potential for growth, easy access, and liquidity, making it a vital asset class for long-term investors.
Nevertheless, many investors are seeking alternatives to traditional stock investments, looking for assets that aren’t closely tied to the stock market. This shift has increased demand for alternative investments. Depending on the type, average returns on these alternatives can range from 5.0% for debt funds to double-digit returns for certain real estate partnerships and other niche alternative investment products.
Alternative investments and stocks have several key differences:
| Key Differences Between Stocks and Alternative Investments | ||
|---|---|---|
| Stocks | Alternatives | |
| Liquidity | Extremely liquid; can trade throughout the day. | Lots of investments come with lock-up periods, which means your money is stuck for a while, ranging from a few months to several years. |
| Fees | Fee-free trading with most brokerages; most ETFs and mutual funds charge less than a 1.0% expense ratio | Fees for investments can be simple or complicated. Some platforms offer low-fee options, while others have more complex fee structures, including additional performance fees. |
| Minimum investment | Fractional stock and ETF shares can be bought on multiple investment platforms for as little as $10 | Platforms cater to accredited and non-accredited investors, with investment minimums starting as low as $10 and going up to four to five figures. |
| Correlation | Stocks exhibit distinct correlations among specific sectors and geographic regions. Lower correlations between assets lead to more price stability within your investments. | Alternative investments can have relationships with each other, but they don’t always move together. The connection between stocks and alternatives varies based on the time and the specific alternative investment. |
Incorporating alternative investments into a mix of stocks and bonds can help smooth out portfolio fluctuations and potentially boost returns. However, it’s important to remember that investing always carries risks, and there are no guarantees.
How to Buy Alternative Investments
Purchasing alternative investments varies depending on the platform and the type of assets you’re interested in. If you’re buying an alternative ETF or mutual fund, you’ll need to open an investment brokerage account. However, if you’re purchasing through a separate company like Cadre, Peer Street, Realty Mogul, or Arrived, you’ll need to follow their specific account setup instructions.
Here’s an easy guide to purchasing alternative investments:
1. Sign up for an account: To begin using a reliable alternative investing platform like Fundrise, Yieldstreet, or Crowdstreet, you’ll need to sign up and create an account. As part of this process, you’ll be required to verify your identity with a government-issued ID.
2. Link a bank account for fund transfers and confirm payment details: Once your account is created, the next step is to link a payment method. This allows you to deposit funds for purchasing alternative investments. Each platform may accept different payment options, so be sure to check what’s available in your region.
3. Select investment and transfer funds: After selecting from the available investment options on the platform, choose the assets you wish to invest in and specify the number of shares and investment type. You’ll then be asked to transfer funds from your linked bank account. If the full amount isn’t used for your investment, the remaining balance will remain in your account as cash for future investment opportunities.
Some investment opportunities are available exclusively to accredited investors, while others are open to everyone. If the platform is limited to accredited investors, you’ll need to provide proof that you meet the accreditation requirements.
Accreditation requirements:
- To qualify, you must have a net worth exceeding $1 million, excluding the value of your primary residence, either individually or with your spouse or partner.
- To meet the criteria, you must have earned more than $200,000 individually or $300,000 with a spouse or partner in the past two years, with the expectation of earning the same amount this year.
- Seasoned investment professional.
If you’re interested in investing in art or wine, there are several options to explore. One simple method is to use crowdfunding apps like Yieldstreet or Masterworks. Alternatively, you can buy and trade through specialised dealers or auction houses.
What You Need to Open an Alternative Investing Account
On platforms exclusively for accredited investors, you’ll need to submit personal and financial information for verification.
Personal Information
Each platform requires investors to create an account and provide basic personal information, such as:
- Full Name
- Email Address
- Phone Number
- Home Address
- Proof of Residence
- National ID Number
- Government-Issued ID
- Financial Information
Accredited investors may need to provide additional bank or tax records to verify eligibility.
Minimum Deposits
Minimum deposits can vary significantly, ranging from $10 to $20,000. Some platforms establish specific minimums for each project. For example, FarmTogether, which is exclusive to accredited investors, begins crowdfunding offers at $15,000 and requires a minimum investment of $100,000 for its Sustainable Farmland Fund.
However, you can find more reasonable minimums when investing in alternative ETFs or mutual funds. Platforms like Fidelity and other investment firms allow you to buy fractional REIT shares or commodity ETFs for just a few dollars.
Best Alternative Investing Platforms
| Company | Focus | Minimum Investment |
|---|---|---|
| Fundraise | Real Estate Investments | $10 |
| Masterworks | Art Investments | $15,000 |
| Yieldstreet | Asset Variety | $5,000 |
| iTrustCapital | Gold and Cryptocurrency | $1,000 |
How to Gain Exposure to Alternative Investments Through ETFs
ETFs (exchange-traded funds) are accessible to all types of investors, regardless of whether they are accredited. There are various alternative ETFs available, including those focused on mergers, arbitrage, risk parity, crypto, metals, real estate, multi-asset, and commodities. You can purchase ETFs through traditional investment brokerage firms like Fidelity, Schwab, Vanguard, and E*TRADE. Additionally, many investing apps such as M1 Finance, Robinhood, Webull, and Public also provide access to ETFs.
Examples of alternative ETFs include:
- RSBT ETF (Return Stacked Bonds and Managed Futures)
- TPMN ETF (Timothy Plan Market Neutral)
- NOPE ETF (Noble Absolute Return)
- RPAR ETF (RPAR)
- MRGR ETF (ProShares Merger)
- BITO ETF (Bitcoin Strategy)
- GSG Trust (iShares S&P GSCI Commodity-Indexed)
What Are the Advantages of Alternative Investments?
The appeal of alternative investing lies in its potential for lower correlation with stocks and bonds. Pension funds and large investors have incorporated alternatives into their strategies for years. However, grouping all alternatives may oversimplify matters. Within this broad category, there are various types of investments. For example, commodities can help protect your money when prices rise, acting as a hedge against inflation. Some investments move counter to stocks and bonds, offering financial strength during market downturns. Others, such as hedge funds and private real estate deals, may deliver higher returns with less reliance on traditional assets.
If you’re looking to diversify beyond stocks and bonds, alternatives can boost overall returns and reduce volatility. Today, all investors can explore alternative options, although some believe the best opportunities are still reserved for wealthy, accredited investors.
What Are the Disadvantages of Alternative Investments?
Investing in alternative options like private funds comes with its risks. These investments are often not regulated by the SEC, making them riskier. While they may offer higher returns, they also carry a greater chance of losing money. Unlike traditional mutual funds or ETFs, alternative investments may be managed by less experienced professionals and involve more complex tax reporting, leading to additional complications.
Furthermore, many alternative investments require you to lock up your capital for extended periods, making them difficult to sell quickly. Some of the best opportunities are available only to wealthy investors, and the fees associated with these investments can be high. Unlike stocks or bonds, alternative investments such as art or wine do not generate regular income. While they have growth potential, they may not align with everyone’s investment goals.
What You Need to Know About Secondary Markets
Many alternative investments offer a solution to their lack of liquidity by providing secondary markets, where you can buy or sell assets after the initial purchase. This differs from the primary market, where you acquire something new, such as when a company first sells its stocks.
Traditional investments like stocks and bonds are easy to buy and sell on public exchanges. Some alternative investments offer platforms where you can find buyers for more unique assets. Before investing, it’s important to understand how quickly you can convert your investment into cash.
What to Consider When Investing in Alternative Assets
Objectives
Many financial experts recommend assigning a specific purpose to your money. When you begin investing, it’s crucial to have a plan that outlines:
- Goal for the funds.
- When you’ll need it.
- Your risk tolerance
Once you’ve determined your goals, time frame, and risk tolerance, you can create your investment mix. If you’re interested in alternative investments like real estate or private equity and are comfortable with their risks and the time required to sell them, you may include them alongside stocks and bonds in your plan. Including a few alternative investments in a diversified portfolio is often recommended to help spread the risk.
Liquidity
Only invest money in the financial markets if you don’t need it for the next three to five years. This applies to stocks, bonds, and alternative investments. While stocks and bonds are easy to sell quickly, many alternative investments may take months or even years to liquidate.
When evaluating alternative investments, make sure you understand how easily you can access your funds. Some private investments, particularly for wealthier investors, may require a minimum investment of tens or hundreds of thousands of dollars and could lock up your money for up to 10 years. Ensure there’s an option to sell your investment early, and assess whether you’re comfortable waiting that long before making a purchase.
Setting Your Time Horizon
Know what you want your money to achieve. Are you seeking long-term growth, steady income, or to keep it safe and accessible? Money intended for short-term goals, such as a vacation or buying a home soon, should not be invested in alternative investments because they can be difficult to convert into cash quickly.
Once you have a clear understanding of your goals and when you’ll need the funds, you can determine if a specific alternative investment aligns with your plan. Review all the investment details and ensure that the duration for which you intend to keep your money aligns with how long it may take to access it. In most cases, it’s advisable to plan on holding alternative investments for a longer period.
Building a Diversified Portfolio
To create a diversified investment plan, start by defining your goals, time horizon, and comfort level with risk. Based on these factors, you can decide if you prefer a safer plan with lower risks and quicker returns or a more aggressive strategy with higher potential returns but more fluctuations. Typically, safer plans allocate more to bonds and cash, while riskier ones emphasise stocks.
Many investment plans allocate a portion of funds to alternative options, which are riskier. It’s generally recommended to keep less than 10% of your easily accessible money in these higher-risk assets. The level of risk you take will impact your potential gains or losses. Riskier plans may offer higher returns but come with greater volatility, while safer plans typically provide steadier results, albeit with lower earnings.
- Raw materials
- Real estate: REITs, private investments, crowdfunding
- Metals – including gold and silver.
- Fine art
- Vineyard investments
- Private loans
- Hedge fund investments
- Digital currency
- Agricultural land
- Foreign currencies
- Private investments
- New ventures
- You’re seeking an opportunity to invest alongside major institutions and high-net-worth individuals.
- You’re comfortable with assuming some risk.
- You don’t require the money immediately.
- You’re seeking the opportunity to earn more money.
- You want to diversify your investments further.
Ultimately, the decision to invest in alternative options is yours to make.
