For most people, investing involves a typical retirement account like an IRA or 401(k). However, many investors can benefit from diversifying their portfolios with alternative investments.
There are many assets that are considered alternative investments. Better yet, they have the potential to bring in higher returns when your brokerage account is lagging.
If you want to figure out whether or not alternative investments are for you, this article can help.
What Are Alternative Investments?
Many people are familiar with the common traditional investments, including stocks, bonds and cash. These are the most frequently added assets to most portfolios.
Almost any other type of investment can be categorized as an alternative investment. These include assets like collectibles, cryptocurrency, hedge funds, real estate and venture capital.
A few things to keep in mind about alternative investments:
- They are riskier because they aren’t usually regulated by the SEC
- Most alternative investments are illiquid
- Their value can be tough to determine
- They add diversification to your portfolio
- Some are mainly held by institutional or accredited investors
Why You Should Consider Alternative Investments
You might be satisfied with a basic 401(k) for all of your investing needs. For the most part, a 401(k) or traditional investment vehicle can cover your bases for growth.
That said, alternative investments are a means of diversifying your portfolio. They can help ensure you aren’t putting all your eggs in one basket.
When you diversify your portfolio, you reduce your level of risk. If one investment goes wrong, you still have others that can pick up the slack.
Alternative investments sometimes do the opposite of the overall stock market. This means that when the stock market goes up, alternative investments may drop, and vice versa.
Some alternative investments like gold or oil can also help protect against losses due to inflation.
How Much Should You Invest In Alternative Investments?
The amount you should consider funneling into alternative investments will vary. There isn’t a one-size-fits-all number to target.
However, most experts agree to keep it fairly low. Some financial advisors recommend that alternative investments make up 7% to 12% of your total portfolio. Others may suggest a range of 10% to 30%.
Due to the added level of risk and lack of liquidity, alternative assets shouldn’t be your primary source of investment income. But, you should also make sure your entire nest egg isn’t wrapped up in an employer-sponsored plan.
Ultimately, the amount you invest in alternative investments should depend on your risk tolerance and retirement timeline.
The Best Alternative Investments
Part of the appeal of alternative investments is the opportunity to have some fun with your money.
Of course, this needs to be done carefully. Don’t throw 75% of your funds into an untested investment fad. It won’t be fun if your portfolio tanks because you put too much money into a single asset.
You can earmark a portion of your investing funds for alternative investments. Choose something you’re interested in exploring, do your research and then consider investing if it’s a promising opportunity.
Here are 10 of the best and most interesting alternative investment options.
1. Collectibles — Sports Cards and Video Games
Do you have a stash of baseball trading cards or vintage video games sitting around collecting dust? If so, you might be able to earn some money by selling your collectibles.
These are items that you can sell for a higher price than their original value. Alternately, you can also purchase items now that you anticipate will grow in value over time.
Collectibles can be risky since it’s difficult to predict their future value. Plus, you need space and the ability to store them safely. This could cost you extra money while you wait for them to increase in value.
Here are some other items that may be valuable collectibles:
- Rare coins
- Movie props
- Antique toys
- Clothing or items connected to a celebrity or historical event
You never know what might fetch a good price. However, investors do need to watch out for fakes when buying collectibles.
In general, these aren’t a reliable means of generating long-term high yields. While they don’t measure up to the returns of a stock market index fund, they can be an entertaining way to diversify your portfolio.
While farmland is technically a real estate investment, it is unique enough to warrant its own evaluation.
You don’t have to be a farmer to invest in farmland. The U.S. Department of Agriculture reports that there are more than two million active farms in the United States.
If you have a high net worth, you could buy land outright. Luckily, those looking for a cheaper option can invest in a specialty REIT (real estate investment trust) for farmland.
Sites like AcreTrader or FarmTogether can help you invest in this alternative asset. It’s also possible to invest in farm-related companies.
Investing in farmland is not risk-free, but it does have the potential to help you earn passive income.
Art is an alternative investment that’s tangible but doesn’t have any “official” market value. Investing in visual art may be a logical choice if you enjoy art and want to own pieces.
Of course, if it’s truly an investment, the goal is to eventually sell the masterpieces you’ve acquired.
Investing in art comes with risks and added costs. Established artists’ work will be more expensive upfront. Furthermore, it’s hard to predict the next big thing in the art world.
It’s important to note that you may need to hold onto artwork for many years to earn higher returns. This means that you’ll incur costs for maintenance and storage.
4. Precious Metals
An investment in a precious metal can serve as a hedge against inflation. This is because banks can print more paper currency, but gold and precious metals are in limited supply.
When you explore investing in precious metals, you can look into buying gold coins or gold bullion.
Keep in mind that gold isn’t the only metal for alternative investments. You can also purchase silver, platinum and palladium. These are generally considered industrial metals with uses for appliances and other products.
You can own physical pieces of precious metals or invest in metal ETFs and mutual funds.
Each type of metal comes with its own set of risks and rewards. Be sure to do your research before investing in them.
5. Angel Investing
If you want to support entrepreneurs and startups with cash to build their businesses, you could diversify your portfolio with angel investing.
This type of investment is typically only available to accredited investors. According to the SEC, this means that you must have a minimum of $1 million in net worth or $200,000 in annual income ($300,000 if joint with a spouse).
Fortunately, as with real estate, there are crowdfunding platforms where non-accredited investors can invest alongside venture capitalists. MicroVentures is one such platform to check out if this intrigues you.
Another option is AngelList. This platform will let you invest in a specific startup or a basket of startups (similar to an index fund).
There are thousands of types of cryptocurrencies that are used as a form of online payment for goods or services.
Certain platforms create their own cryptocurrencies, which customers then use to pay for products or services. People must exchange regular currency for cryptocurrency in order to pay with it.
Perhaps the most widely-known cryptocurrency is Bitcoin. Others that are fairly common include Ethereum, Litecoin, XRP and Bitcoin Cash.
To learn more about investing in Bitcoin or other cryptocurrencies, check out our Coinbase Review.
7. Non-Fungible Tokens
Non-fungible tokens, or NFTs, are units of data stored on blockchain. They’re a digital asset that is not easily exchangeable for something else.
One NFT isn’t equal to any other NFT, so they can’t be traded equally. These are unique pieces of digital property. Perhaps the most common use for NFTs is in the art world.
Many creators are making ridiculous amounts of money selling NFTs of their work. Grimes, digital artist Beeple and the founder of Twitter are a few people making money from NFTs.
Recently, videos of great moments in sports, collections of digital images and original songs have all sold as NFTs.
NFTs are relatively high risk because the value is not easily determined. You might buy an NFT only to find there is zero resale market.
Be cautious with this type of investment and only shell out the big bucks if you have money to burn. That said, it’s possible to snag a great return by reselling your NFTs on the secondary market.
8. Real Estate – Crowdfunded
It used to be that only those with a significant amount of money to invest could participate in real estate. This was back when buying an investment property required a down payment and another mortgage.
As a landlord, you’d also have to either enjoy maintenance and upkeep or spend more to outsource those jobs.
Now there are around 100 platforms where you can invest in real estate through crowdfunding. You pool your money with other investors to become a shareholder in real estate property.
Crowdfunding real estate sites can help you explore the financial benefits of real estate without all of the headaches. You may even be able to earn a 12% yield.
9. Mineral Rights
Investing in mineral rights is a form of real estate investing. Mineral rights let you collect royalties from drilling or mining companies.
Gas and oil royalties are two of the most common mineral rights in the United States.
People make money from mineral rights by leasing the minerals out, selling all or a portion of the minerals or taking part in their development.
Be mindful that most people can’t just jump into this type of investment without a significant amount of research. You’ll probably need to hire a mineral rights consultant or broker and a tax expert to assist you.
As a result, this type of investing is likely not ideal for a beginner investor.
10. Tax Liens
In a time when the stock market has been relatively volatile and returns seem somewhat uncertain, tax lien investing could be a useful alternative investment option.
Tax liens are government claims made against a property owner for failure to pay property taxes. The owner cannot sell or refinance as long as the lien is attached to the property.
Investors can purchase tax liens at physical or online auctions. You could choose a residential or commercial property. It’s also possible to choose undeveloped land or property that’s been improved.
Then, you pay back the lien to the issuing municipality. After that, the property owner will pay you back. This will usually include a repayment schedule they follow as they pay you back for the lien plus interest.
While tax liens can bring in decent returns, there are risks. For example, the property owner may be unwilling to pay the taxes owed. Commercial investors may also provide competition and drive down yields.
There’s quite a bit of time and effort involved in doing your due diligence before investing in tax liens. You might also have to deal with issues like evicting the occupants if they are unable to pay on time.
This type of investment is not recommended for new investors or those looking for a simple way to earn passive income.
As you start exploring alternative investment options, you may have questions. Here are some answers to frequently asked questions about alternative investments.
Alternative investments are any asset-producing investment that isn’t in stocks, bonds or cash.
Popular alternative investments include crowdfunded real estate, precious metals, fine art and angel investing.
While certain alternative investments are readily available to novice investors, others are better left to those with experience in various investment types.
There are several positives and negatives to consider with alternative investments.
The pros of alternative investments include diversification, the potential for high returns and a way to hedge against inflation.
Nevertheless, you also assume a higher level of risk with most alternative investments. They’re not as liquid as stock investments, and their value is often hard to nail down.
Alternative investments can have a high barrier to entry, both knowledge-wise and financially. Certain opportunities, such as tax liens and mineral rights, can be very complex.
Estimates will vary, but most experts agree that investors should aim for a small percentage of their portfolio. Ideally, this could be 10% or less based on your investment timeline and risk tolerance.
Be realistic and study the key information of any alternative investment you’re considering. Some of these have more of a proven track record than others.
You don’t want to get caught up in the hype of something you don’t quite understand. That’s an easy way to lose a lot of money.
As with any investment opportunity, there is a risk of losing money with alternative investments.
It is important to do your research before investing in any asset. Also, make sure to diversify your portfolio to minimize your level of risk.
Alternative investments provide opportunities to diversify your investment portfolio, especially if you want to earn monthly investment income. Protecting yourself from inflation is another benefit.
While alternative investments shouldn’t make up the majority of your portfolio, most people can benefit from allocating a small percentage of their portfolio to one or more alternative investments.