Summary
- Alternative investments are investment options that don’t include the traditional stock market, retirement plans, and savings
- They offer wealth building through avenues other than the stock market and some offer tax-advantages
- As with all investments, diversification, and limiting risk is important
- Some are more illiquid, making them more difficult to sell on short notice
Typically, most people consider their savings, stock markets, or their 401ks as investment opportunities. Alternative investments are anything other than these traditional forms of investment. As with all investments, alternative investments require caution. Only invest what you can afford and always learn about your investments.
There are a variety of alternative investments. As with all investments, you need to know what to buy, how long to hold on to the investment, and when to sell to make a profit.
Real-estate investments
Real estate investing can begin with purchasing a home. The main advantages of investing in real estate are the amount of control the investor has over the actual investment and the significant returns in the real estate market. After the U.S. housing crisis in 2008, the market recovered in 2012 with 13% over the year before.
Although returns have cooled a bit since the robust period between 2012-2016, housing prices continue to increase annually at an average rate of 4%. Despite the COVID crisis, there was a housing boom in the U.S in the summer of 2020.
The advantage of real estate investment for homeowners is they can make improvements on their property and raise the value of their investment through their own efforts. Purchasing a rental property can provide a monthly return and increase in value. Some investors prefer long-term tenants while others may choose to rent to Airbnb guests. Commercial real estate investments can be lucrative and involve buying and renting office, store, or mall space.
House flipping can be highly profitable but requires some effort. This involves buying inexpensive homes, fixing them up, and selling them at a higher price. This is a good option for those who like home DIY projects or have access to contractors who can renovate homes affordably.
Invest in precious metals
Gold is a valuable asset in a portfolio as a hedge against inflation and because this precious metal has strong, consistent returns, particularly in periods of uncertainty.
If you want to invest in physical gold, you can buy bullion or coins. Even though gold offers no dividends, it retains its store value and its 20-year price has gone from below $500 per ounce to $1,899. Its price does fluctuate but it has grown steadily.
Gold is among the most popular but not the only good precious metal investment. Silver and palladium and platinum are also options. Vaults and special storage facilities are needed for physical metals.
There are other ways of investing in precious metals besides buying physical metals. Owning derivatives and stock in mining companies gives your portfolio exposure to precious metals. Precious metals ETFs provide diversified investments in precious metals, although ETFs don’t involve a direct investment in physical precious metals.
Cryptocurrencies
P2P lending
Peer-to-peer lending involves providing loans to individuals and businesses and collecting interest. Peer to Peer lending evolved on the internet as an alternative to bank lending. The borrower provides their credit score, income, some financial history. Investors can give funds for part of the loan or the entire loan and receive returns of anywhere from 6% and the mid-double digits.
The advantage of peer-to-peer lending is that it allows your money to work for you with relatively little research or effort. However, peer to peer lending is a high risk, since default is always possible and the loans are not insured by the FDIC. This is a high-risk, high-reward investment, but there is relatively little work involved and you can just wait for the interest to roll in.
Cryptocurrencies
Cryptocurrencies have become popular alternative investments that tend to attract either ardent enthusiasts or skeptics. Cryptocurrencies are digital currencies that are used for purchasing and investments. Some of the most popular cryptocurrencies include Bitcoin, Ethereum, Ripple, and Litecoin, but there are thousands of them.
Cryptocurrencies are traded person to person on the internet without a middleman. Given the lack of regulation and the decentralized nature of these digital currencies, they can be extremely volatile and vary in value wildly. In 2017, bitcoin jumped from $900 to $20,000. This can be good news if you bought bitcoin then, but these digital currencies can move downward too.
Cryptocurrencies are risky investments, but many people have made (and lost) money on them. Do not use your savings or any money you actually need if you are investing in cryptocurrency, but you can put a little extra cash in these investments and see what happens.
Luxury assets
The Wall Street Journal ran an article two years ago about how art outperformed stocks and bonds that year with a return of over 10%. Fine wines followed closely and according to the report, vintage cars, coins, and jewelry all had good returns over 10 years.
Dietrich Hatlapa, director of Historic Automobile Group International is quoted from the article: “Investors decided to allocate more to classic cars as part of their portfolio because they couldn’t find returns elsewhere, but there are more alternatives as interest rates normalize.” These investments require lots of money and knowledge, but if you are interested in fine arts or wine, you can invest.
Investing Outside of the Box
You can make some serious money if you invest outside of the box. However, some of these riskier investments, such as cryptocurrencies and person to person lending can lead to losses. As with any investment, doing your due diligence and researching options thoroughly is a necessary first step. Thinking a bit differently can create significant returns if you plan well and pay attention.
