Diversifying an investment portfolio means that you don’t invest all of your investment dollars in the same asset.
Some people consider a few dozen individual stocks to be a diverse investment portfolio. Others want to buy broad-based index funds that track entire stock markets. And others want bonds, stocks, and cash to keep their portfolios from becoming too volatile.
However, diversification can go beyond typical financial investments. Some investors may turn to alternative investments to add to their portfolio.
Although alternative investments are often referred to as a group by financial advisors, this asset class offers a variety of investment opportunities. But which alternative investments are the most popular? Read on to find out!
What are alternative investments?
Alternative investments are typically any investments that are not cash, publicly traded stocks, or bonds. ETFs and mutual funds are usually made up of stocks and bonds, so these assets are considered mainstream. But virtually all other assets are considered “alternatives”.
Alternative investments may be known as publicly traded REITs or esoteric non-fungible tokens (NFT). Some of these assets produce cash flow; others provide stable long-term store of value. Others are speculative but can get a 100x return over time.
Some people buy alternatives simply to diversify. Others look for uncorrelated returns to complement other areas of their portfolio. Or others are just simply enthusiastic about the industry (e.g. crypto from collectibles).
The 8 most popular alternative investments
Below we list 8 of the most popular alternative investments available today. It is important to understand each of these options before diving into them. Here’s what you need to know.
1. Real estate
Real estate is probably the best known and most popular alternative form of investment. Most real estate investments aim to achieve a steady cash flow proportional to the value of the investment.
Some real estate investments focus on growth. These investments are focused on “hot” markets where the value of real estate in the market is increasing rapidly. Some real estate investments focus on buying and selling in these hot markets. And investment managers (or investors themselves) often use funds to build (or renovate) and sell real estate.
Real estate investments can include:
Aside from the investments listed above, investors can buy RV parks, campsites, development shares, and more. Here, too, it is important to find out more before buying an alternative investment.
Infrastructure investments are an offshoot of real estate investments. They include ownership of certain properties that produce value. For example, an investor can own an oil rig, part of an oil pipeline, a cell tower, and more.
Real estate investors can potentially invest in these through private REITs. Or you can buy them directly through a Master Limited Partnership.
Much like real estate, debt investments are among the most popular alternative investments as they outsource cash flow over time. Investors who buy debt expect a company to pay back a loan (including interest) over time. Investing in debt capital can include:
4. Private company
Private business investment involves buying shares in unlisted companies. While this is risky (many companies can go bust before they buy out), some can have large exits. And many people with experience building their own businesses choose to invest in other private companies. This enables them to act as consultants and support the growth of the company.
Private business investment can include angel investment, which means that initial financial investments are made available to a young company. It can also include venture capital investments that include follow-up investments for more mature companies. If you want to invest in private companies, SeedInvest, Mainvest, and SMBx are three popular platforms.
5. Precious metals
Precious metals include assets like gold, silver, platinum, and more. These can be coins with a “numismatic” value or simple bars (usually stored as bars). Precious metals are popular alternative investments as they are often touted as non-correlating assets (although that depends on the rest of your portfolio).
Typically, precious metals investors want to be the direct owner of these assets rather than simply owning an ETF that tracks the value of the metal. This is because they usually want to know that their investment could be used in times of need.
Lower precious metals like buying silver bars can be the cheapest place to start. But investors can also buy gold or other more expensive metals. Embedded in a platform that allows you to buy gold through an app!
Cryptocurrency includes any blockchain-enabled digital token that investors can use as a store of value. Bitcoin, the original cryptocurrency, was developed as a stable store of value similar to gold or silver. The founder (or founders) envisioned a world where cryptocurrency promoted competition and transparency between government-backed currencies.
Thanks to the overwhelming demand for cryptocurrencies, crypto is not circulated in the same way as fiat currencies. Lots of people buy and hold cryptocurrency, which leads to prices increasing over time (even if the number of tokens increases over time).
Although everyone is talking about cryptocurrencies right now, investors should be aware of security risks, volatility, and potential long-term losses before making a choice. Right now, these are the top cryptocurrency investing sites.
7. Raw materials
Commodities are assets that are bought and sold on exchanges at fixed prices. The most common raw materials are plants (like wheat or corn), energy (especially oil) and precious metals (discussed earlier). Commodity investments can be complex, especially because it is the “futures” market, which is used to compare the future value of a commodity.
As strange as it sounds, commodity investors don’t necessarily have barns full of crops or an oil rig full of oil. You can make all of your investments digitally to ensure that supply meets demand and is profitable as a “middleman”.
Investors can buy commodity funds through publicly traded mutual funds and ETFs. Commodity funds can have volatile prices in the short term. But they’re usually a decent inflation hedge in the long run.
8. Visual arts and collectibles
Fine art and other collectibles are difficult to evaluate because they are all “one of a kind”. The value of the Mickey Mantle rookie card is entirely determined by demand, as is the value of an original Picasso or other collectible item.
Art and collectibles have always been popular investment alternatives. But historically, only the ultra-rich or the ultra-lucky have been able to get hold of some of these high-quality items.
However, financial technologies make it easier for retail investors to buy “shares” of these valuable goods. Masterworks is one of the first apps to open up visual arts to Mainstreet investors. Collectable does the same for sports memorabilia.
The alternative asset class is full of investment opportunities that few investors have seriously considered. But in the digital age, it’s now easier than ever to find popular alternative investments that suit your needs.
However, alternative investments are “alternative” for a reason. They don’t exactly fit certain criteria. And it can be difficult to predict how they will develop. Investors should be prepared for the possibility of low liquidity or low returns when investing in alternatives.
Ultimately, every investor has to decide whether to include alternatives in their portfolio. If you’d rather stick with more familiar assets like stocks, bonds, and funds, then make sure to check out our favorite online stockbrokers and robo-advisors.