If you’re looking to invest money in areas outside of the traditional stock market, cash alternative investments are a perfect option. They can provide you with portfolio diversification and enhance your overall returns. As one of the fastest-growing fields in finance, alternative investments are expected to grow by 59% by 2023, reaching $14 trillion in assets according to Prequin. You might be wondering what these non-traditional investments are and how they can benefit you. Use this guide to get answers to those questions and others about alternative investments.
Who Do Alternative Investments Benefit?
About a decade ago, this answer would be different than it is today. Previously, non-traditional investments were ideal for high net-worth individuals, but today they can benefit a wider group of investors. In 2017, the Fair Investment Opportunities for Professionals Experts Act allowed for the expansion of specific criteria for investors that went beyond net worth and included those who have experience and financial knowledge. This allows experts to become accredited investors and protects those who aren’t from any type of financial loss.
What Types of Alternative Investments Exist?
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Many different types of alternative investments exist, and it’s always best to do a little research before you make such large purchases. Look through this list of alternative investments for some suggestions:
- Real estate equity. Perhaps the most well-known type of alternative investment, real estate appreciates over time. This means you have a larger return on investment when it comes time to sell, but there’s no one type of appreciation. Real estate is also considered an inflation-protection investment that can diversify your portfolio.
- Private mortgages. As a lower-risk option with the potential for attractive yields, private mortgages are a loan provided to a real estate owner with a one- to five-year contract. They’re also known as real estate debt funds, and loans are made at no more than 60 to 70% of the property’s market value. Another option is mortgage note lending, which can give you passive income.
- Private company equity. Private companies are usually smaller than public ones and allow investors to get more involved. Private company investors are more likely to influence decisions.
- Artwork and collectibles. If you opt for this type of investment, be prepared to have some knowledge and patience. The key to being profitable with artwork and collectibles is to correctly predict how they might increase in value. It might take 20 to 50 years for this type of investment to be profitable.
- Hedge fund. This type of investment is one of the more sophisticated options as investors pool their money together and give it to the hedge fund. In return, the hedge fund uses different investment strategies to generate high returns and absorb any losses for the investors. Some are blind pools, which means you don’t know where your money is allocated.
- Commodities. As tangible assets, commodities create consumer products such as metals and crops. Investors can purchase and sell commodities directly on the stock market but you can use them for an alternative investment since they benefit from inflation.
How Are They Different Than Investing in the Stock Market?
Since you cannot trade alternative investments on the public market, they typically have less transparency when it comes to their pricing. They also have less liquidity. For instance, you can look at a specific stock and determine how well it is doing, but it’s more difficult to determine how niche assets such as farmland are fairing. It’s also easier to sell 5,000 shares of stock than you can sell 5,000 acres of farmland.
What Are Some Benefits of Non-traditional Investments?
As mentioned, alternative investments aren’t like stocks in that they’re more difficult to determine the pricing. However, there are benefits as well. Because these investments don’t fluctuate based on the market, they don’t usually experience declining market values.
One of the most appealing benefits is that they’re an excellent way for you to diversify your portfolio. Diversification reduces your risks and enhances your return. During those times when your investments perform poorly, you want other investments to pick up the slack and make up for some of those losses. Alternative investments don’t follow the traditional stock market, so it’s hard to gauge when one of your investments will perform well or poorly. Diversification can help.
The benefits aren’t just limited to increasing your wealth. By allocating some of your money to more niche areas, such as films or startup companies, you can feel good about assisting a cause you feel strongly about. With a traditional stock market investment, you might not have the opportunity to contribute to such unique endeavors.
What Are Some Cons of Alternative Investments?
Unfortunately, alternative investments have a few downsides that you should consider before putting handing your money over. Although it can enhance returns, these investments require you to lock up your money for up to 10 years. You should seriously determine how much return you can get from alternative investments versus the liquid public markets.
Another downside is that the alternative investments are illiquid, which makes them hard to sell compared to other types of investments. They can also be more costly than stocks and bonds, making them almost impossible to invest in. For instance, if you’re looking at investing in artwork, you might need several million dollars to purchase a well-known piece.
What Should You Know Before You Start?
Intending to generate high returns, alternative investments come with high risks. If you’re considering several types of alternative investments, make sure you speak with your investment advisor to determine which options are best for your situation. Unlike the traditional stock market, alternative investments don’t publicize their performance, which oftentimes makes it harder to research.
It’s never a bad time to consider alternatives to the stock market. If you’re interested in learning more about alternative investments or want to get started with them, reach out to our team of financial professionals at Titan Funding. We offer alternative options for investing money by using data analysis, underwriting, and personal evaluations. Our goal is to make your money work for you, and you can do so through alternative investments.