Diversification is the key to any long-term investing strategy. Whether this means building some speculation into a conservative portfolio or vice versa, you want your money spread out over a variety of assets. In recent years, many investors have begun to embrace alternative investments as a good way to achieve this. For help investing in alternative investments, consider working with a financial advisor.
Alternative Investments Defined
While there’s no hard and fast definition for an “alternative investment,” they’re generally defined as any asset outside of stocks, bonds and cash. The upshot is that most things you can buy and sell are considered an alternative investment. This includes assets like art, collectibles, startup businesses, hedge funds and venture capital funds, foreign currencies and real estate.
Investors are debating whether cryptocurrency and standard derivatives, such as options contracts, should still be considered alternative investments. They have become so widespread that many investors believe these asset classes have moved into the mainstream. However, one of the key aspects of an alternative investment is that it obeys rules and risks beyond the experience of most investors. Options and cryptocurrency almost certainly meet that definition, as even many of the retail investors who buy and sell these products don’t necessarily understand what’s happening underneath the hood.
For that reason, move slowly if you’re starting to explore alternative investments. They can be an excellent way to broaden your portfolio. However, they are also specialized assets, each with its own profile for risk and reward. So read carefully, speak with your financial advisor and then if you want to dive in, here are a few great places to start.
Many alternative investments (often most alternative investments) are restricted only to accredited investors. This doesn’t pose a risk, as these platforms will not allow you to create an account, but read the terms carefully to avoid wasting a lot of time and effort.
Yieldstreet – Diversified Investments
Yieldstreet is one of the most popular alternative investment platforms on the market. It offers a variety of alternative investment assets, most notably commercial real estate, debt securities, business investment and art. Yearly management fees range from 0% to 2.5%. All of its products are selected for their opportunity to generate strong returns, or “yields.”
While most of the platform’s funds are reserved for accredited investors, its Prism Fund is open to non-accredited investors and carries a $500 minimum balance. In other words, it offers investment opportunities that ordinarily have only been available to institutional investors, allowing individuals to buy into some of the most lucrative assets on the market. Investors should remember that high-return assets generally correlate with higher risk. For retail investors, the accreditation requirement means that this platform is a fun window shopping opportunity, but worth a look if for nothing else than a learning experience.
Crowdstreet – Real Estate
Real estate may be the most popular form of alternative investment on the marketplace, and it can take many forms. If you have ever rented out your apartment as an Airbnb or looked at buying a home for its future value, you’ve participated in the real estate market.
More professional real estate investing generally comes in the form of what’s called “securitized” investment. This means that a real estate investment has been broken into shares and made available to third parties. Usually this means that a developer wants to build, so they either sell direct shares in their project’s future profits or they take out a loan which then gets sold off to third parties. Direct shares tend to be more lucrative, but debt tends to be far more secure.
Crowdstreet, which specializes in debt-based assets, is by far one of the most popular platforms on the market for making real estate investments. Annual management feees range from 0.5% to 2.5%, and there is a $25,000 minimum balance.
Prosper is what’s known as a peer-to-peer lending platform. In fact, it’s widely credited with establishing this model. In this form of investing, individuals and small businesses will seek out loans in the four- or five-figure range. (Prosper allows loans between $2,000 and $40,000.) Then, individual investors will stake the money for these loans based on a variety of factors such as the borrower’s goals, their creditworthiness, their income, the proposed interest rate, etc. An investor can either stake the entire loan or a portion of it, and they make their money based on the interest rate and the borrower’s repayment.
This model has its advantages and disadvantages. Due to the small size of these loans, interest rates tend to be relatively high and repayment plans tend to be relatively quick as compared with debt instruments like bonds and real estate. However, also due to their small size, your returns off any given loan tend to be relatively modest.
The peer-to-peer lending model differs from crowdfunding platforms in that this is a loan, with defined repayment terms and (again) an interest rate. Prosper is noteworthy among these platforms for the fact that you don’t need to be an accredited investor in order to use it.
Art and antiquities are one of the highest profile segments of alternative investing. They don’t have a huge financial footprint in this field. By both money and transactions, the art world remains relatively small compared to most investment products. However what art lacks in volume it makes up for in popular imagination. Just about everyone understands how valuable art is, and how finding a Picasso or Monet would mean unearthing a buried treasure.
The problem is that, like real estate, investing in art requires a significant buy in. Ordinarily you can’t invest in Van Gogh unless you can afford to buy that painting in the first place. This is the problem that Masterworks.io aims to solve.
With this platform you can buy shares in art and antiquities for as little as $20. These shares work the same way as any other form of securitized investment. You pay based on a percentage of the work that you want to buy, and when it sells at auction you receive returns on the same basis. This allows you to invest in the art world for a relatively small amount of money. Even better, Masterworks.io is not restricted to accredited investors. However, the fees can be steep for retail investors: Annual management fees are 1.5% and Masterworks.io gets 20% of profit from an artwork’s sale.
Masterworks.io has a partnership with Alto IRA that lets you invest your IRA earnings into their artwork and antiques.
The Bottom Line
Alternative investments can be an exciting, fascinating way of investing. They are a great way to diversify your portfolio and, frankly, can be a very interesting way to learn about other aspects of finance. Just be careful… these products all have their own risks and rewards, and the same diverse footprint that makes them valuable also means that they require careful research before you commit your hard-earned money.
- A financial advisor can help you with alternative investments or any other investment questions. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Use SmartAsset’s no-cost investment calculator to get a quick estimate of how your investments could grow over time, based on how much and how long you contribute as well as the estimated interest rate.
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