Diversify your portfolio with alternative investments.
Those early in their investment journey might take that to mean buying stocks from a few different companies whose operations are uncorrelated.
But that would amount to a basket with some different colored eggs in it, all still bound to the fate of the basket.
Though the stock market is the investor go-to, the rise of algorithmic trading has tangled the performance of individual companies to the market at large.
That’s why investors are looking to diversify their portfolio by investing outside the stock market in alternative investments.
What are alternative investments?
It’s easier to characterize alternative investments by what they are not. They are not cash, public stocks, and bonds. Consequently, they are generally less liquid and longer-term strategies.
On the upside, they open numerous avenues and opportunities ranging from safe investments with steady yield to high risk-investments with potentially quit-your-job returns. But where to start?
Here are seven of the best stock alternative investment ideas investors can consider.
Alternative investment 1: Private REITs
- Barrier of entry: Moderate
- Risk factor: Low
- Potential returns: Above average
One way to get into the real estate market is through a private REIT. They have all the characteristics of REITs traded on the stock market, except they are privately held.
Real estate is widely considered to be a safe and reliable investment over time. Private real estate investment group are also insulated from stock market volatility since the aren’t caught up in EFT and other stock collectives.
A private REIT uses pools investor capital to purchase and maintain property. As a shareholder, you buy into that portfolio and enjoy the property value gains.
One of the biggest upsides to investing in property is that it generates income. Most alternative investments require capital to be tied up for an extended period of time, and any profit only comes at the point of selling. Real estate also accumulates profit for the point of sale in the form of market value. But it also had the added benefit of generating income while your capital is invested in the form of rental payments.
Compared to buying investment properties and managing them independently, REITs are a ‘set it and forget it’ investing strategy that involves zero late-night tenant plumbing emergencies nor tens, if not hundreds of thousands upfront for a downpayment and a commitment to a mortgage.
HappyNest, for example, allows investors to buy in for as low as $10. By investing in HappyNest, you become a partial owner of our portfolio, which includes an industrial shipping facility currently on a 10-year lease with FedEx and a commercial pharmacy on an 8-year lease with CVS.
That means your can build a passive income stream by becoming the landlord of companies you know are good for rent.
Alternative investment 2: Cryptocurrencies
- Barrier of entry: Low
- Risk factor: Above average
- Potential returns: Above average
Right now, there’s little doubt the United States in poised for growing inflation in the years ahead. Trillions of dollars were printed and put into circulation without a corresponding growth in economic output.
That’s bad news for savers, and impetus enough for investors scrambling to find stable, alternatives to preserving their net worth.
That’s at least part of why cryptocurrencies have gained so much traction from investors.
Once considered somewhat of a joke by big-name investors, the attitudes around Bitcoin and other digital currencies has taken a drastic turn in 2020.
With global markets volatile and the future opaque, a currency independent politics, governments, and stock markets look pretty appealing nowadays.
Flagship Bitcoin has trail-blazed for other cryptocurrencies to get on the radar of institutional investors. Major companies like Microsoft, Shopify, PayPal, CashApp, and Amazon (through a third-party app) now accept Bitcoin, with more on the way.
Some of the brightest minds of our time have taken public interest in the space. Their involvement all but guarantees the space’s growth for the foreseeable future.
The upside to foreign and cryptocurrencies compared to other alternative investments is that they are highly liquid. You can also invest just a few dollars if you want to, so the commitment level is low.
This stock alternative investment has a promising long-term trajectory that is becoming increasingly difficult to dismiss.
However, there are still challenges ahead. The space will likely continue to experience high volatility in the coming years, so investors have to be able to stomach that.
That being said, the whiplash to those price swings can generally be remedied by zooming out on the time chart. The overall trend is still a steady march upward and forward.
Alternative investment 3: Gold, silver, and other precious commodities
- Barrier of entry: Moderate
- Risk factor: Above average
- Potential returns: Variable
At the end of the day, gold is widely considered to be the best alternative investment of all time. After all, it is the undisputed GOAT when it comes to currency longevity. Silver and other precious commodities like copper,
There are several ways to get into trading these, but gold enthusiasts believe in its long term value as a hedge against the collapse of FIAT currency and/or the stock market.
There’s some truth to this claim. As the purchasing power of the dollar declined in the wake of the Great Recession, gold’s price went parabolic.
Precious commodity hodlers argue that it has intrinsic value not only in its widespread recognition, but because it also has industrial applications.
On the long term, the upside of gold and other precious commodities has held up for those with patience and long-term horizons. Gold holders had to ensure a major price correction and 7-year sideways period before finally seeing some movement to the upside in late 2019.
Alternative investment 4: Private credit: Private debt
- Barrier of entry: Low
- Risk factor: Above average
- Potential returns: Above average
Peer-to-peer lending cuts the middle man (i.e., the bank) out of lending.
Through platforms like Lending Tree or Peerform, you can lend money (investment) to a person or a business. Then, you play banker and charge interest on repayment.
The returns on private debt can be high – in the double digits.
But for every yang, there’s a yin. High potential returns come with high potential risks.
Applicants’ risk profiles oftentimes do not meet the loan criteria for standard banks. That’s something the private lender (you) have to be willing to take on. If the borrower defaults, well, c’est la vie.
That being said, peer-to-peer lending as an alternative investment idea tends to perform better in economic downturns. That’s because banks become more risk averse and tighten their lending criteria.
In a study released in August of this year by MarketWatch, the peer-to-peer industry was projected to grow by 30% – a sign that investors aren’t quite bearish on this alternative investment strategy just yet.
It’s also worth noting that the industry as a whole saw a high growth period after the Great Recession of 2008 as the credit markets recoiled.
That could mean that 2022 might shape up nicely for those with a bullish risk tolerance.
Alternative investment 5: Private equity
- Barrier of entry: High
- Risk factor: High
- Potential returns: Max
Embrace your inner hipster: Find the next big thing before it goes mainstream.
That’s private equity investing 101.
The key differentiation between private equity and publicly traded stocks is that stake in the company is not available to just anyone.
And just like the sharks, private equity firms generally invest in startups, privately held companies, and companies in distress.
They provide the capital the company needs, either to scale or overcome an obstacle, as well as ‘business management services’ (for better or for worse).
At the end of the day, the goal of private equity investment is to generate value and return for investors – and a lot of it.
The good news is, according to global capital management firm Bain & Company, private equity investments have generated a 60% higher return on investment compared to the S&P 500 over the last 30 years.
The bad news is that unless you spend your Wednesday afternoons on the golf course, private equity might be prohibitively expensive to get into.
A $250,000 would be on the lower end of the entry price to go through an institution – and to be properly ‘accredited.’ But keep in mind: that buy in is still the coach class, boarding group C of private equity.
Alternative investment 6: Hedge funds
- Barrier of entry: High
- Risk factor: Medium
- Potential returns: High
Hedge funds are similar to private equity. They pool investors’ money and make strategic deals they’re betting will produce return. They’re also similar in that they require investors to be ‘accredited’ (read: a certified rich person).
Like private equity, a $250,000 minimum investment is par for the course. It can run many times higher depending on the firm.
The key differentiator between hedge funds and private equity is the types of asset investments they make.
Like private equity, hedge funds also buy stakes in private companies. But hedge funds investment strategies are more diversified.
They also invest in public companies, real estate, and tangible commodities that appreciate like gold, fine art, wine, and collectibles (rumor has it the hedge fund manager who bet big on beanie babies in the ‘90s is no longer in the business).
Big hedge fund managers are the celebrities of Wall St. – Ray Dalio, George Soros, and Bill Ackman. Those with the means to buy into their exclusive club can ride their coattails into the sunset.
Warren Buffett, is not a hedge fund manager. What makes him different? Unlike hedge funds, the average investor can ride his coattails…by buying public shares in his company Berkshire Hathaway – no ‘accreditation’ required. No wonder he’s America’s favorite billionaire.
But if you can swing it and meet the accredited investor criteria, hedge funds tend to be pretty hands-off investments. After all…you’re outsourcing managing that part of your wealth to someone else.
Alternative investment 7: Venture capital
- Barrier of entry: Moderate
- Risk factor: High
- Potential returns: High
Venture Capital is what companies need to either kick off or start scaling. It is the earliest round of investing companies get as they start to dial up operations.
You can become a venture capitalist fairly easily thanks to angel investor sites. They allow you to browse through young companies seeking out capital. Many of them aren’t asking for millions. Some only need a few thousand to get through a financial bottleneck that’s holding them back.
If you’re seasoned in the particular industry, you could really hit it big as in the alternative investment space of venture capital.
But it’s important to understand that most businesses at this stage do fail, so. you are at risk of losing a large portion, if not all of your investment. Additionally, even if the company you invest in does ultimately achieve great success, the timeline you’d be operating on is long – several years, potentially a decade or more to see real returns from. As far as getting your investment back out earlier than that? Iffy at best.
So while Venture capital might be one of the highest potential alternative investment ideas, it also comes with quite a bit of risk.
Adding alternative investments to your portfolio
Now that you’ve expanded your view on potential investment opportunities, it’s time to consider if branching out makes sense to you.
If you’re portfolio is too concentrated in public equities and you want to manage your risk, allocating a slice of your net worth to a private REIT or other non-traded investment class will alleviate the pressure – and give you opportunities to catch big wins.