The investment market has thrived through the years on traditional trading practices. Stocks, bonds, mutual funds, and savings accounts are long-standing vehicles investors have used to grow wealth. But in recent years, new options have broken out of the mold to enrich and diversify investment portfolios.
Alternative investments have gained a foothold in the modern investment marketplace, growing steadily over the last decade. Forbes predicts that by 2025, alternative investments will reach $21.1 trillion in value, representing 15% of all assets under management (AuM).
In the last few economically uncertain years, alternative investments have emerged as passive income sources that can withstand market uncertainty.
More mainstream investors are adopting alternative instruments to shape their portfolios. What kinds of assets qualify as “alternative”? What kind of investor is the best fit for alternative investing, and how should one approach the practice?
Types of Alternative Investments
Strictly speaking, alternative investments are any assets outside the traditional investment marketplace — anything besides stocks, bonds, mutual funds, and index funds. A few such vehicles have been around for decades, while others have emerged since the beginning of the 21st century. Alternative investments can include:
- Real Estate: Apartment buildings, commercial properties, and undeveloped land
- Private Equity: New or developing companies raising venture capital for growth and operations
- Hedge Funds: Strategic investment pools that protect investors in economic turmoil
- Art and Collectibles: Original artwork, classic cars, coins, antiques, and other collectible items
- Peer-to-Peer Lending: Crowdsourced or private funding for individual or business ventures
- Private Debt: Investing in debt securities for entities not on the stock exchange
These are just a few of the most commonly used alternative investments. Almost any commodity not directly served by the stock exchange can represent a unique investment opportunity.
Why Alternative Investing Could Be a Good Idea
Alternative investments have grown as society, innovation, and the economy have evolved. Technological breakthroughs, sustainability, population growth, and business competition are some ongoing forces ushering in new investment vehicles.
These investments can diversify one’s portfolio, a strategy designed to hedge against economic downturns or slumps.
Most alternative investments are surprisingly stable and less volatile since they don’t correlate to broader market trends. Indeed, many alternative investments exploit inefficiencies in the traditional market to generate income.
A few traits of alternative investment vehicles further distinguish them from traditional commodities. They tend to be illiquid or not easily convertible to cash equivalents. This trait encourages a long-term approach to alternative investments.
Many alternative investments are regulated differently than other holdings. Some have legal and tax implications that investors must be fully aware of. By definition, alternative investments can be high-risk, but if you temper expectations, they can be profitable.
What Kind of Investors Are Alternative Investments Good For?
While alternative vehicles are increasingly available to everyday retail investors, some financial profiles are more attuned to taking a chance with them.
High-net-worth individuals are frequently alternative investors, as their resources allow them to pursue diverse interests and drive innovation. Long-time investors with sophisticated knowledge of the investment marketplace can also benefit from alternative investments.
Organized, large-scale investors — venture capitalists, financial institutions, endowment funds, and private equity investors — often seek opportunities in the alternative market. (More accurately, the alternative market seeks them.)
Any investor with high-risk tolerance, long-term goals, and a preference for diversification may find an alternative vehicle that suits their interests.
Finding the Right Financial Advisor
Just as alternative investing attracts a particular type of investor, it also requires a capable, informed financial advisor for assistance. Once you’ve set your investment goals, look for an advisor with good credentials and reputation. They should have direct and frequent experience with alternative investments with a proven track record. Successful financial advisors are transparent about fees and operations and embrace new technologies.
Find a financial advisor who can communicate clearly about alternative investments, which can be a little complex for new investors. Your advisor should also be comfortable tracking the alternative marketplace and developing an exit strategy.
Given the nature of their focus, the financial advisor should also be compliant with all existing regulations and laws. With a clear sense of investment goals, a strong stomach for advanced risk, a deliberate long-term strategy, and a solid financial advisor, you may find an entirely new realm of economic comfort and success with alternative investments.
