Alternative investments: investing beyond stocks, bonds and cash

“Alternative” may be reminiscent of renewable energy or a mixtape from the 1990s, but it also has a place in the investment world and refers to almost any asset that is not stocks, bonds, or cash.

purchase gold or other precious metals? It’s an alternative investment.

Investing Money in Your Brother’s New Business to Reduce Future Profits? Acquisition of employee shares in your pre-IPO company? Pumping thousands of dollars into a coin, coin or record collection? Buy bitcoin? All are examples of alternative assets.

Most investor portfolios have three main components: equity investments (like stocks), fixed income investments (bonds), and cash or cash equivalents like money market funds. Any other asset is classified in the collective category “alternative asset”.

Interest in alternative investments – or “olds” as industry insiders say – has increased since the financial crisis as investors seek greater diversification in investments that do not track the performance of stocks and bonds.

Alternative investments can be an effective way to get around diversify a portfolio, but carry much higher risks and distortions in value.

Gold, for example, is viewed by some as a recession-friendly investment – when the stock market has a big pullback, the price of gold often goes up. But if you look at longer time horizons like the past 30 years, the Dow Jones Industrial Average – a good representation of the overall stock market – has outperformed gold by a large margin.

Most investors will never take alternative investments seriously, and that’s fine – alts are often risky and poorly regulated, if at all. That means it can be difficult to get transparency about pricing, that is, to know if that asset is really worth what you pay for or get. Alts are also more “illiquid,” which means they are more difficult to convert back into cash. Selling shares of a publicly traded stock worth $ 1,000 is relatively easy; Pricing and selling a rare $ 1,000 coin or record album, less.

So caution is advised: According to a 2016 survey co-funded by the Financial Planning Association, financial advisors recommend that alternative investments should not make up more than 10% of a portfolio.

Most of the players in this speculative space are institutional investors or the very wealthy. You may have heard of hedge funds, an alternative investment that often uses riskier financial instruments like derivatives to offset – or hedge – other market risks. However, state regulations require that hedge fund investors have made at least $ 200,000 in each of the past two years or have $ 1 million in assets without their primary residence. Private equity – think of the angel investors who pour millions into startups – is also out of the reach of the average investor unless you have pre-IPO employee stock options with a private company.

Alternative assets for the joint investor are:

• Property: Real estate investment is about buying property for income, not to use it as a residence. This could be buying real estate for rental income or buying shares in real estate investment trusts that invest in companies that finance or operate commercial real estate. Investors can buy publicly traded REITs through an online broker. (Want to know more? See this guide on investing real estate.)

• Bitcoin and other cryptocurrencies: The spot price for Bitcoin broke through $ 50,000 for the first time on February 16, 2021, which is attracting great interest from investors. Here is more on What is Bitcoin and how it works.

• Raw materials: Cows, corn, oil, gold or other important raw materials that are grown or mined are raw materials that are risky to buy and sell as the price can fluctuate widely for various reasons. A drought can raise the price of corn, or a decision by the Organization of Petroleum Exporting Countries to drill more can lower the price of oil. Investors have access to these markets through mutual funds or exchange traded funds that focus on commodities.

• Peer-to-Peer (P2P) Lenders: P2P lenders allow private investors to put money in non-banks that provide commercial and personal loans.

Other types of alternative investments include Currencies through forex trading, Carbon credits, art, postage stamps or other collectibles whose value can potentially increase over time.

A growing number of online estate agents offer trading in alternative assets or related funds. However, some alternative investments require you to buy direct from asset managers and asset management firms. This comes with higher fees that vary depending on the asset.

Regulations are less common than with more traditional investments like stocks and bonds, and the amount of public information used to assess the value of the asset is more unclear. Knowing the market and potential risks for each alternative asset class is likely to require more homework (and guesswork) for the consumer. The caution “buyers watch out” is particularly important when venturing into the world of alternative investments.