Investing Beyond the Usual: A Guide to Alternative Assets

Venturing beyond the typical stock, bond, and mutual fund landscape leads you to the realm of alternative investments. These assets, also known as “alts,” encompass a wide array of options like derivatives, digital currencies such as cryptocurrency, non-fungible tokens (NFTs), precious metals, collectibles, commodities, real estate holdings, and private equity stakes.

Alternative investments generally share several key traits:

• They operate under less stringent regulatory oversight than traditional investment vehicles.

• Liquidity can be a concern, as selling these assets can be more challenging.

• Their price fluctuations may exhibit weak correlation to the overall stock market’s movements. This independence means that a market downturn might not necessarily impact the value of your alternative assets, and vice versa.

• Higher risk profiles are typically associated with alternative investments. While all investments warrant careful consideration, “alts” necessitate an elevated level of caution. A prudent approach involves allocating no more than 10% of your investment portfolio to these higher-risk ventures.

Here’s a glimpse into eight categories of alternative investments that could be worth considering for your portfolio.

Derivatives are investment instruments that derive their value from an underlying asset, commodity, or market index. Common examples include futures contracts and foreign exchange (forex) trading.

• Futures: These contracts represent agreements to buy or sell a specific asset at a predetermined price on a future date. It’s important to be aware that futures contracts can sometimes require physical delivery of the underlying asset upon expiration. Selling the contract before expiry might be necessary, even at a loss, to avoid unwanted deliveries.

• Forex Trading: Also known as forex trading, involves speculating on the fluctuations of various currencies. For instance, if you predict that the U.S. dollar will appreciate against the euro, you might exchange euros for dollars. Note that forex trading is not always offered by regular brokers and may require finding a specialized forex broker.

Cryptocurrencies represent a form of digital currency. Various types of crypto coins exist, such as Bitcoin and Ethereum. You can use cryptocurrency for transactions or invest in it, hoping that its value will increase over time.

• While some online brokerages facilitate crypto purchases, many investors prefer to store their holdings in a more secure crypto wallet. Self-custody can enhance security but involves its own set of responsibilities and risks. You can discover how to buy cryptocurrency here.

• Cryptocurrencies and NFTs, among other digital assets, are built upon blockchain technology.

• If you seek exposure to the crypto market without directly owning cryptocurrency, explore crypto stocks. These companies operate within the crypto ecosystem, such as those manufacturing mining equipment or operating exchanges. Bitcoin ETFs are another option; these investment funds hold large quantities of Bitcoin and reflect Bitcoin’s price movements.

Non-fungible tokens (NFTs) act as proof of ownership for unique digital items. These can include digital artwork or virtual items used in video games. Since their peak in 2021, NFT values have generally decreased.

Valuable for centuries, gold and silver can provide a hedge against inflation within a diversified investment strategy.

Consider these investment methods for precious metals:

• Directly purchasing the metal is possible as bullion (bars or coins) or jewelry. While owning physical gold may sound appealing, storage and subsequent sales can present logistical challenges.

• Some brokers like Fidelity and Interactive Brokers allow purchasing precious metals through their platform, and may also offer storage services.

Securing, storing, and eventually selling collectibles like wine or art can be challenging. Selling an antique sculpture or muscle car may require networking and specific expertise to find willing buyers.

Commodities encompass raw materials like oil, wheat, and corn. Investing in commodities intersects with other alternative categories. For example, you can trade commodity futures or invest in precious metals. Another approach is to invest in commodity stocks or commodity ETFs.

Real estate offers diverse investment paths, including Real Estate Investment Trusts (REITs), using real estate investment platforms, or directly purchasing physical property.

REITs function like mutual funds, but specialize in owning, operating, or financing income-generating properties, such as apartment buildings. REITs are required to distribute at least 90% of their taxable income to shareholders as dividends, which may provide a revenue stream for investors^[0]

Crowdfunding platforms have democratized real estate investing, enabling participation in private REITs and property investments historically restricted to accredited investors. However, some platforms still restrict access to accredited investors only.

Purchasing properties directly can appeal to those with sufficient capital for down payments and upgrades. However, this approach can concentrate capital into a single asset, requiring property management or maintenance responsibilities.

Private equity involves acquiring ownership in private companies. Access is typically granted through private equity firms, with high minimum investment thresholds often restricted to accredited investors.

Gaining exposure to alternative investments typically involves three principal approaches:

2. Direct investment in the asset itself.

3. Investing in a company that operates in the asset’s production or distribution.

4. Investing in a fund that includes the company in its holdings.

An example: You can purchase physical gold, shares in a gold mining company, or an ETF that tracks gold prices.

Acquiring alternative assets can require more effort than traditional investing. Some may be purchased via a regular brokerage account, while others, such as futures and forex, may require specialized account setups. Crypto exchanges are where you’ll find digital currencies. For real estate crowdfunding, you can utilize specialized real estate investment platforms. Alternatively, collectibles may be purchased at auctions or in private transactions. To access alternative investments through stocks or funds, you need a brokerage account.

Diversification: Spreading your investments across different sectors and regions helps mitigate risk. Investment diversification is enhanced by alternative assets because their performance may not closely mirror traditional investments.

Potential for High Returns: Alternative investments present the prospect of significant financial rewards. However, realizing substantial gains depends on making astute investment decisions at the opportune moment. It’s crucial to acknowledge that even experienced professionals may misjudge the market, leading to losses.

Accessibility: Access to alternative investments was limited to wealthy or accredited investors. Now, everyday investors have more opportunities to gain exposure to them.