Investments that don’t fall into one of the traditional categories like stocks, bonds, or cash are considered “alternative”.
Alternative investments encompass a variety of assets but share many similarities. They tend to be illiquid, unregulated, and risky, but also yield high returns and counterweigh traditional investments
Examples include private equity (angel investments), hedge funds, commodities, and cryptocurrency, as well as tangible assets like art, wine, coins, and precious metals.
Investors make alternative investments for one reason—diversification.
Because alternative investments have a low correlation with standard asset classes like stocks, they are an excellent counterweight. This means that while stocks and bonds are hurting, alternative assets may be doing just fine.
As investors, we never want to have all our eggs in one basket.
Also, things like gold, antiques, and oil provide a hedge against inflation, retaining their value far better than cash.
Alternative investment vehicles are usually riskier than stocks and bonds.
Compared to something like stocks, alternative investments have less legal oversight and regulation. And while they are subject to examination by the Securities and Exchange Commission (SEC), they don’t have to register with them.
Being risky investments, they are also very rewarding. As you already know, high levels of uncertainty bring high potential rewards.
Alternative investments tend to be volatile and thus provide higher returns.
On the other hand, the stability, predictability, and history of something like bonds, make them incredibly safe to invest in, but they provide low returns.
There’s risk, and then there’s liquidity.
While stocks are easy to sell—being a large market for them—something like a collectible baseball card or an apartment building is much harder to sell.
For alternative investments, there may only be a niche market interested in buying. This can make them difficult to value and difficult to liquidate.
Let’s review what we’ve learned so far about alternative investments:
Counterweight to traditional assets
Difficult to value
Great for diversification
Hedge against inflation
Real estate is one of the most common types of alternative investments. It has become a huge part of popular culture—Monopoly anyone?
When people think of real estate, they usually think of an ultra-rich investor. And while there are some forms of real estate investing that normal investors can get into, for the most part, it's rather exclusive.
Investors buy rental properties, becoming landlords in the process. They make money through rent payments or the appreciation of the property.
Most investors who deal in art, antiques, or collectibles are experts in their niche.
If you have a significant amount of money to begin investing, you are an expert, and you have a passion for your niche, you can make good returns here.
In 2018, art was the top-performing asset class, beating out real estate, gold, and the S&P 500.
Investing in private, pre-IPO companies—also known as angel investing—is a highly lucrative form of alternative investment.
Angel investments have the highest average returns of any asset class. This makes them ideal for wealth creation rather than just wealth preservation. Investors who can navigate the risks of angel investments can earn much higher returns than any traditional investments.
The profitability of startups can persevere through tough economic times. Some of the most successful startups were created during, or immediately after, economic downturns.
Best of all, angel investments dodge some of the pitfalls of other alternative investments.
For example, Investing in art or real estate has a significant barrier to entry. These assets demand steep upfront costs and expert-level knowledge to get started.
Investing in startups, on the other hand, is much more forgiving. You can begin angel investing for as little as $100. And you don’t need years of experience to test the waters.
Also, most angel investments are regulated by the SEC. Investing through Regulation Crowdfunding platforms brings a level of security, as all startups are registered and regulated.
Real estate crowdfunding is like traditional real estate investing without the high price or responsibility that comes with it.
Just like with equity investing, you invest in a project, becoming a shareholder and part-owner of the venture. Only now, with physical property instead of a startup.
From there, you can earn profits from rental payments or the sale of the property.
With low investment minimums—usually around between $100 and $1,000—real estate crowdfunding is a low-risk avenue into the world of real estate investing.
Lastly, we have cryptocurrency. This is one of the newest types of alternative investments.
With crypto, digital currency is distributed and tracked using blockchain technology.
Usually decentralized, these networks work using a ledger that is maintained across users’ devices in the network.
In cryptocurrency investing, the product is usually a “coin” that investors purchase with the hopes that it will appreciate over time.
With Bitcoin’s mainstream success, many investors turn to crypto, hoping to find that next big currency. The crypto market, being fairly new, is still quite risky. At the same time, huge returns are possible for savvy investors.
Alternative investing is a mixed bag.
With them, you can diversify your portfolio, counterweigh traditional investments, and earn some of the highest returns possible.
At the same time, they are less predictable and riskier than their traditional counterparts.
Of all of the alternative investments out there, angel investments are my top choice.
The minimum investments are low, they are regulated, offer incredible return potential—and best of all—startups persevere through the difficult economic times.