Ten Investments You Likely Haven't Considere
/The vast majority of investment education, especially in the United States, centers around the stock market. But what if you aren’t drawn to stocks? Are there other ways to build a successful investment portfolio?
Absolutely. In this article, I’ll share what alternative investments are, how they differ from traditional asset classes, the potential benefits and drawbacks, and ten examples that you can consider adding to your portfolio.
What are alternative investments?
Alternative investments, also known as “alternatives” or “alts” are generally considered to be any investments made in asset classes other than stocks, bonds, and cash.
Alternative investments aren’t traded on public markets like Dow Jones or NASDAQ, instead, they’ve traditionally been only available to an exclusive few such as accredited investors.
As of December 2020, an accredited investor is an individual who has earned at least $200,000 in income for the last two years and/or has a net worth of $1 million excluding their primary residence.
How are alternative investments different than investing in the stock market?
In short, alternative investments tend to have less transparency and less liquidity than traditional asset classes. Why? Because there isn’t a public market governing the value of these assets. Although this is changing due to fintech companies such as Vincent and Acre Trader diving into the alt investment space. For example, it’s easy to find out how well Bumble’s stock is doing, it’s not as easy to find out the current value of farmland in central Missouri. Continuing with this thread, it is much easier to sell 3,000 shares of Bumble stock than it is to sell 3,000 acres of the farmland in Missouri. While this is starting to change with technology, it will take time for the process to be as quick as the stock market.
But there is a caveat to being able to sell quickly on the stock market. The caveat is that it is vulnerable to price swings. Whereas alternative investments are generally unaffected by shifts in the market.
What are the potential benefits and drawbacks of alternative investments?
Alternative investments are generally considered to be a good way to diversify your portfolio since they are not typically impacted by swings in the stock market. On a feel-good note, alternative investing gives you the opportunity to blend your passions into your wealth-building strategy making for a delightful experience with your money.
In terms of drawbacks, generally, it can be difficult to make money from alternative investments without already having a lot of money since many of them still require accredited investor status. For the alts that do not have this requirement, it can be a challenge to generate any sort of consistent return.
As with anything, but especially with alternative investments, the higher the risk, the higher the potential reward.
What are different types of alternative investments?
Now that you and I both know what alternative investments are, let’s dive into examples of these asset classes. Here are ten examples of alternative investments that you can start researching.
1.Real Estate
I’m sure you’re familiar with real estate as an asset class, but I had to include it because it was one of the most well-known alternative investments and one of the most accessible. Real estate is probably one of the most well-known and appealing alternative investments. Real estate is also considered an investment that is inflation protected, or an inflation hedge, making it an investment that can help diversify your portfolio. There are also tax benefits to buying real estate.
Money & Mimosas Tip: Avoid these five mistakes when purchasing your first investment property
2. Farmland
Another unique alternative investment is farmland. Similar to real estate, the potential upside to purchasing farmland is appreciation. Investing in farmland is definitely playing the long game, so prepare to hold on to your investment for at least five years (usually much much longer) before seeing a healthy return.
Thanks to technology platforms such as FarmTogether and AcreTrader, investing in farmland is much more accessible. However, you do need to be an accredited investor to participate.
3. Private Mortgages
Private mortgages are essentially a loan provided to a real estate owner over a 1-5 year contract period. Generally, private mortgages are considered a low-risk alternative investment with a high potential upside. This is because these loans are usually no more than 60-70% of the market value of the property and since this investment is backed by real estate, the risk is low if the borrower defaults on the loan. Of course, every investment comes with some risk so be sure to consult a professional before jumping into a private mortgage contract.
4. Angel Investing
An angel investor is a person who invests in a new or small business venture. Angel investment is a form of equity financing where the investor provides capital (aka cash) in exchange for taking an equity position in the company. An angel investor typically looks for a return of around 25 to 60 percent. However, many of these investments do not pan out because investing in start-ups is very risky.
5. Equipment Leasing
Equipment leasing funds are pooled alternative investments. This means you’ll pool your money into a portfolio of capital equipment with other investors. The pool of capital is then “loaned” to other companies to use for leasing equipment. The equipment could be anything from medical supplies to heavy construction machinery.
Typically, equipment leasing funds go for 7-10 years until the equipment depreciates and is sold. While this can be lucrative, it is also risky because you do not have a say in what type of equipment is being leased and the equipment could be damaged. As always, do your research and ask experts lots of questions.
6. Fine Art and Collectibles
Investing in fine art and collectibles requires a lot of market knowledge and patience. But if it’s your passion then acquiring this knowledge will be a fun process. The key is to accurately predict which items will appreciate over time.
Generally, this time period can be 20-50 years. That’s a long freaking time, so be prepared to patient and fall in love with the process. The risks include inaccurate predictions, counterfeits, and basic wear and tear to the items. Similar to farmland, there are more technology platforms such as Masterworks and Yieldstreet are popping up to make investing in fine art more accessible.
7. Commodities
Commodities are tangible assets used to create consumer products like metals, crops, livestock, and more. There are also “soft commodities” that cannot be stored for long periods of time like cotton, sugar cane, and coffee.
Although you can buy and sell commodities directly on the stock market, like other alternative investments they are available outside of the market. In this case, usually via derivatives such as futures and options. Similar to the benefit of real estate, commodities are another alternative investment that usually benefits from inflation. As demands for commodities increase, naturally so do their prices which helps hedge against inflation.
And you should remember that when it comes to certain ones, such as precious metals, you are going to be able to make it a lot more affordable by using a self-directed IRA such as you can see in this Augusta Precious Metals Review. As with any investment, do your due diligence and work with an advisor to determine the best route for you.
8. Marine finance
Marine finance is a cool option for all of you that love the ocean. It is financing the construction, scrapping, and/or acquisition of vessels like boats and ships. Something to keep in mind is that marine finance is highly correlated to market trends - any downturn in the global economy or a rise in tariffs, will manifesting in the shipping industry. It’s a risky venture that can lead to some exciting adventures.
9. Film
You can also invest in the process of making a film. As you can imagine, this investment is hella risky. Mostly because the success of this investment is highly dependent upon whether or not it is well-received by the forever fickle-natured public known as human beings. Your investment would cover the production costs, hiring a talent scout, the talent(s) fees, and a long list of items related to producing a film.
10. Intellectual Property
Intellectual property is any intangible creation such as inventions, artistic works, names, and images. For example, Money & Mimosas® is a registered trademark and therefore intellectual property for me, its creator. Intellectual property is a unique alternative investment because its value can increase indefinitely. It can be leveraged to secure lucrative licensing deals, brand partnerships, and much more.
My Two Cents
Ultimately, I believe alternative investments are a fun and necessary component of building long-lasting wealth. The key is to pick the ones that you are most passionate about, do your research, and then take action. Thanks for reading!
Disclaimer: the content presented in this article is for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.
Disclaimer: the content presented in this article is for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.
