For some people, “wealthy” can mean simply meeting their household needs. For others, maybe it’s holding enough money and assets to be considered a sophisticated investor. Whatever your definition of wealth, once you have your future secured through steady, long-term assets, you can choose to explore alternative investments for your investment portfolio. Alternative investments encompass anything that isn’t a traditionally regulated security. If you think you can make money off something, it can be an alternative investment. Here are some examples of alternative investments that you might want to consider.
Have questions about alternative investments? It might be helpful to reach out to a financial advisor.
What Are Alternative Investments?
Alternative investments can be any asset that is not a traditionally regulated financial security, which accrues value through no labor of your own.
Some investors define alternative investments as any “asset classes that aren’t stocks, bonds or cash.” Others define alternative investments as assets that are outside of the market and traditional regulation, meaning assets like stock options, futures, commodities, derivatives and even currencies would all be considered traditional investments.
Regardless of how you want to define alternative investments, they tend to share a few key characteristics:
- They tend to be low-liquidity and low-volume investments, meaning they’re more difficult to buy or convert into cash.
- They tend to have little, if any, government regulation.
- And they tend to be weakly, if not negatively, correlated with traditional asset classes.
Their low-liquidity and low-regulation characteristics make alternative investments a riskier, often more difficult, asset class. Negative market correlation tends to give alternative investments their appeal. Low correlation means that it’s easier for alternative investments to outperform the market, or to thrive when other investments are struggling. This creates their particular niche as a more speculative, high-risk/high-reward type of investment.
Precious Metals
Precious metals are one of the most popular alternative investments. Gold and silver have always been attractive, and remain relatively easily to buy, either through shares (giving you ownership of assets stored elsewhere) or physical holdings (as bars or coins).
Among precious metals, gold is the most popular. Historically, it has had a negative correlation with the stock market at large. Investors tend to move into gold when the stock market does poorly, making it generally trend up when the market is down. This isn’t necessarily a strong trend, and gold is more often held as a long-term asset than used as a short-term haven during bear markets.
Debt
There are a lot of ways to invest in debt beyond regulated bonds and derivatives. Among others options, lenders and firms sell shares of debt for investors. These are segments of a loan, and work similarly to a bond, but are typically smaller and through the private market rather than through regulated bond offerings.
You can also simply extend a loan yourself. Depending on your level of wealth, you can lend money to individuals and small businesses for a profit. This tends to be a more complicated area legally, as you need to ensure that your loans are well-structured, but it can be profitable. You can also pursue this through the relatively recent field of peer-to-peer lending, in which third parties facilitate lending to and from individuals. This can help give you the framework to extend a loan relatively safely and easily.
Collectibles
If precious metals are a popular alternative investment by volume, collectibles may be the most popular asset class by reputation, and almost certainly the broadest. After all, who doesn’t love the idea of investing in and collecting something they have a true passion for, such as baseball cards, comic books, or even classic cars and motorcycles?
Investing in collectibles means buying an item you believe has individual and cultural value, and will appreciate based on that significance. As one analyst for Kiplinger noted, this is an investment class where “nostalgia rules.”
And investing in this passion and nostalgia can really pay off. By the end of 2023, six-figure sales for sports memorabilia grew by 14% year-over-year on average, beating the S&P 500 by several points. Classic board games and other vintage items can also sell for big money.
Art and Wine
Related to the collectibles market, art and wine tend to be longer-term investments. This market is measured in decades, if not centuries. In particular, art and wine tend to hold intergenerational value to a degree that most collectibles do not. Where many buyers in the collectibles market are interested in objects that have significant individual meaning (a beloved comic book character or athlete, for example), art and wine buyers tend to be interested in historic meaning.
This helps make art and wine a slightly more stable investment, as there’s a more objective market for a Van Gogh than a Fraggle Rock lunchbox.
As with many alternative investments, getting a sense of scale for this market is difficult. Individual stories stand out more, like a case of wine that sold for $180,000 at auction. Still, UBS estimates the global art market at $65 billion, making this a lucrative space even beyond the headline-grabbing sales.
Real Estate
Real estate has long been a popular alternative investment, and nowadays, there are more ways to break in, especially for investors with smaller amounts of money to invest. For example, the explosion of short-term rentals on Airbnb has opened up a world of opportunities, allowing investors to monetize a condo in a popular area if they don’t have the money to buy a whole apartment complex.
Purchasing land for either commercial or residential use is another option. This investment can generate income through rental, making it good for short-term cash flow, and will often increase in value, making it good for long-term capital gains.
You can also invest in a real estate investment trust (REIT). A REIT is a portfolio of shares of real-estate based investments, which can range from mortgages and secured debt to commercial leases and residential sales. Since these are share-based portfolios, you can often invest with even a few thousand dollars, making REITs far more accessible than buying real property outright.
Hedge Funds and Venture Capital
While hedge funds and venture capital are two separate alternative investments, they are both managed by dedicated firms (either hedge funds or venture capital firms), and are only available to accredited investors.
With a hedge fund, you buy shares of a fund that invests in a wide variety of assets. The purpose of the fund is to generate high, market-beating returns, and it can invest in just about any asset or position in order to do that. This can involve, for example, exotic trades, leveraged positions, and alternative asset classes, all based on how the fund thinks it can make money. This can make hedge funds very profitable, but very risky.
Venture capital (VC) funds, on the other hand, tend to seek out new and emerging businesses. With a VC fund, the firm uses your (and other investors’) money to fund new businesses. The returns are then generated based on the performance of this underlying business. Again, this can be risky, but also lucrative for the investments that pay off.
Nonpublic Shares
Another alternative investment is nonpublic shares, namely, businesses that are not publicly traded. This can be through formal shares, if the company has formal shareholders, or by simply investing for a percentage of ownership. This is a wide field. Less than 1% of all businesses in the U.S. are publicly traded, meaning that there are millions of profitable firms out there not listed on the stock market. By investing in these companies, you provide them with valuable liquidity in exchange for a potentially valuable investment.
Depending on your strategy, you can pursue either mature businesses that are looking for investment, or startup companies looking to get off the ground. With mature businesses, you get a more stable investment. Meanwhile, startup companies have higher risks, but higher rewards. In all cases, however, you typically must be an accredited investor to trade private shares.
Bottom Line
The field of alternative investments applies to pretty much any asset class that is not part of the regulated, publicly traded market. These assets can generate high returns and often are uncorrelated with the market, but come with potentially significant volatility and risks.
Tips on Wealth-Oriented Investing
- A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Just because you might be a wealthy investor, doesn’t mean you wouldn’t benefit from the assistance of a financial advisor. If anything, it might be more important that you find someone who can help you plan for the long term. Here’s what to look for in a financial advisor.
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