Alternative Assets: Investing Beyond Stocks, Bonds and Cash
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What are alternative assets?
Most investor portfolios are made up of three key ingredients: equity assets (like stocks), fixed-income assets (bonds), and cash or cash equivalents, like money market funds. Any other asset is lumped into the catchall “alternative asset” category.
Buying gold or other precious metals? That’s an alternative investment.
Putting money into your brother’s new business for a cut of future profits? Purchasing employee shares in your pre-IPO company? Pumping thousands of dollars into a mint stamp, coin or vinyl record collection? Buying bitcoin? All are examples of alternative assets.
Why invest in alternative assets?
Interest in alternative asset investing — or “alts,” as industry people say — has grown since the financial crisis, as investors seek greater diversification into assets that don’t track the performance of stocks and bonds.
Alternative investments can be a powerful way to diversify a portfolio, but carry much higher risks and turbulence in value.
Gold, for example, is considered by some people to be a recession-friendly investment. When the stock market has a big pullback, the price of gold often goes up. But when you look at longer time horizons, like the past 30 years, the Dow Jones Industrial Average — a good representation of the overall stock market — has significantly outperformed gold.
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Real estate
Real estate investing is purchasing property to generate income, rather than to be used as a residence. That can be buying a property to earn rental cash or buying shares in real estate investment trusts, which invest in companies that finance or run commercial properties. Investors can purchase publicly traded REITs through an online broker.
» Learn more from our guide to real estate investing.
Bitcoin and other cryptocurrencies
Cryptocurrencies are digital assets and cash traded through peer-to-peer lending. Bitcoin is the highest valued cryptocurrency, or a form of digital cash.
The spot price for Bitcoin broke $50,000 for the first time Feb. 16, 2021, drawing a great deal of interest from investors. Here's more on what Bitcoin is and how it works.
» Learn more: What cryptocurrency is and how it works
Commodities
Cows, corn, oil, gold or other essential raw materials that are grown or mined are commodities, and buying and selling them can be risky because the price can widely fluctuate for a variety of reasons. A drought can raise the price of corn, or a decision by the Organization of the Petroleum Exporting Countries to drill more can lower the price of oil. Investors have access to these markets through mutual funds or exchange-traded funds that focus on commodities.
» Learn more: What is a commodity?
Peer-to-peer (P2P) lenders
P2P lenders allow private investors to invest cash in nonbank companies that give commercial and personal loans.
Other kinds of alternative investments include currencies through forex trading, carbon credits, art, stamps or other collectibles that potentially rise in value over time.
Some other alternative assets in this speculative realm tend to be dominated by institutional investors or the very rich.
You may have heard of hedge funds, an alternative investment that often uses financial instruments such as derivatives to balance — or hedge — against other market risks. But government rules require hedge fund investors to have earned more than $200,000 in each of the past two years, or to have $1 million in assets excluding their primary residence. Private equity — think of the angel investors who put millions into startups — is also out of reach for the average investor, unless you own employee stock options at a private company before its initial public offering.
How to invest in alts
A growing number of online brokers offer trading in alternative assets or funds linked to them. But for some alternative assets, you need to buy directly from money managers and wealth management firms. That will carry higher fees, which will vary depending on the asset.
Regulations are less commonplace than in more traditional forms of investment like stocks and bonds, and the amount of public information to assess the value of the asset can be murkier. Knowing the market and potential risks for any alternative asset class will likely require more homework (and guesswork) for the consumer.
