While stocks, bonds, and cash are considered the most conventional ways to grow and store your wealth, some investors use other asset classes like real estate, businesses or even art acquisitions to diversify a portfolio even further. These alternative investments tend to be more tangible and more direct than stocks, so they also provide more opportunities for hands-on decision-making and using personal expertise, which can make them a little more exciting than just following price movements in the stock market. In this guide, you’ll find an overview of several popular alternative investments to help you get a sense of what your wealth-growing options are outside of the stock market.
Why Choose Alternative Investments
Investors seek out alternatives to stocks, bonds and cash for a lot of reasons. Some may find the stock market confusing while others just prefer more hands-on options where they can buy and sell real, tangible assets or inject funding into a new business idea they want to see grow. Still others choose to do both. They maintain a portfolio of stocks and bonds but add alternative investments as a way to further diversify their portfolio.
Real estate can offer some of the most generous returns at relatively low risk. Whether you buy and sell properties, build up a collection of rental properties or join other investors in crowdfunding or real estate investment trusts (REITs), it can be a good way to grow your wealth.
While the stock market can shoot up or plummet by thousands of points in a single day, real estate markets tend to be more stable. That doesn’t mean they are risk free. Housing bubbles do happen and some methods of real estate investing, particularly crowdfunding, can be extremely speculative. Investors still need to do their research and be aware of the potential risks with each investment.
While art is more often thought of as just a luxury item you can buy with your wealth, some investors use it as an investment vehicle, too. A collection of valuable artwork can grow in value with time just like real estate and other tangible investments. Like real estate, growing your wealth this way takes research and planning. You need to identify the pieces that have potential to grow in value and then care for and maintain the products so that they remain in great condition.
An art collection can also generate income for the creative investor. If you prove to be talented at spotting lucrative acquisitions, for example, you could sell your services as an art advisor or lend out portions of your collection to museums or studios for exhibitions.
Investing in a Business
For investors with an entrepreneurial spirit or a talent for coming up with exciting business ideas, growing your wealth by investing in your own business ideas may be one of the most rewarding investment routes.
There are a few ways you can go about this. If you want to roll up your sleeves and be actively involved in a business, you can use the cash you’ve been squirrelling away for the right investment opportunity to found and run your own business.
If you prefer a more hands-off approach, you can look for crowdfunding or other opportunities to invest in business ideas you think have potential. Investing in businesses directly like this gives you a much larger stake in the company than you can typically get for the same amount of cash if you buy shares on the stock market. Depending on how large a stake you get, you may even have some say in the direction the business takes.
Complex Alternative Investments
Where real estate, art and businesses involve a more straightforward process of looking for tangible assets that either have the potential to be sold at a profit or to generate steady income, complex assets can be a little trickier. While these have the potential to generate profit or steady income, they tend to carry more risk and sometimes require more complicated trading strategies to achieve the returns you’re hoping for.
All investments require research and planning before you put your money on the line, but these complex products require even more as you should be fully familiar with how they work and how to use them. When used correctly, however, these strategies can be just as profitable as other investments.
Peer-to-peer (P2P) lending, especially through online platforms, is an increasingly popular alternative investment option. Essentially, you use your personal savings to give out small loans directly to other individuals. In exchange, the borrower agrees to pay the loan back in installments at a set interest rate. That interest rate can range from around 5% to as high as 35%. The rate depends on the risk profile of the borrower. The higher the risk, the higher the interest rate.
As lucrative as it can be, P2P lending can be risky since you’re dealing with individual borrowers who could default on the loan. Since these loans are generally unsecured by any other asset, a default means you have to eat the loss. Diversifying your capital across multiple smaller loans to avoid the risk of a single default wiping out your entire investment helps. But depending on how high your risk tolerance is, the threat of defaults might make this option too risky for some investors.
Investing in farmland is functionally about the same as investing in any other real estate. However, unlike residential or commercial properties, the criteria used to evaluate potential deals is very different and your potential buyers will, likewise, have different priorities.
As an investor, rather than a farmer, you’ll typically be buying farmland for the purpose of selling it soon after or renting it to farmers. The profit potential comes from the fact that agricultural land enjoys remarkably steady appreciation. The demand for food never decreases, so the value of farmable land is unlikely to ever decline in value except in rare cases of land bubbles or if the land’s resources become depleted.
Moreover, the agricultural products you can grow on the land have an inverse relationship with inflation. That means that when the value of the dollar is eaten up by periods of rapid inflation — something that can hurt the value of conventional stocks, bonds, or cash assets — the price of food and agricultural products will typically rise in pace with that inflation. So, farmland can be a good way to hedge your portfolio against bearish markets and economic downturns.
Fine jewelry, like art, can be a great tangible asset to store or grow your wealth. Unlike art, however, the value is far less dependent on the subjective tastes and criteria of the times. The gemstones and precious metals used to make fine jewelry are inherently valuable, so the risk of the asset losing value as a result of changing aesthetic trends is far lower.
Not only do the raw materials ensure that it will always at least be worth the gold, silver or gemstone it’s made of, but the quality and aesthetics of the jewelry piece can also add to its value in the same way that artwork is made valuable for the skill and beauty found in it. A collection of antique or rare fine jewelry, for example, can end up being worth far more than the equivalent in unprocessed bars of gold or silver.
Moreover, precious metals and gemstones have an inverse relationship with the market. That is, when the economy trends downward, the value of these assets tend to go up. This makes fine jewelry a helpful asset for hedging your portfolio against bearish markets. When other assets start suffering from a stagnating economy, the increasing value of your fine jewelry can help make up for some or all of those losses.
With that said, fine jewelry doesn’t offer a ton of opportunities for steady income generation. It provides fewer options for, say, loaning out the collection or otherwise generating a passive income stream from it. It can be a great method for storing wealth and hedging your portfolio against economic downturns, but if you’re looking to generate passive income, other alternative investments might serve you better.
Some investors also look to storage properties as a passive income source. Storage properties — large warehouses or self-storage buildings — provide investors with an opportunity to lease or rent…
Read More:Best Alternative Investments for 2021 • Benzinga