The majority of investors are all too familiar with traditional Wall Street investments. Most people are used to buying and holding some combination of stocks, bonds, and cash in their portfolios.
Today, times are changing and it doesn’t make much sense to buy bonds or hold cash. Bond yields are near historic lows and when they do rise, their prices will fall while the value of cash continues to get eroded by inflation. This leaves stocks as most people’s primary wealth building choice. However, if the market crashes early in retirement you could face a financial disaster, which is why you should consider adding alternative assets to your portfolio.
Alternative assets include any investment holdings that are different from the traditional ones you find on Wall Street. They can help you diversify your investment dollars, reduce your risk, and may even offer huge financial gains, too!
However, like all assets, these have risk and unique characteristics, too. Some of them require a large amount of money up front or they may not get bought and sold using traditional exchanges. In many cases, this makes them illiquid and not easily sold for cash. You may have to hold on to them for years before you’re able to find a buyer and profit.
For example, if you needed to sell Amazon stock, you could sell it at almost anytime due to it being on an exchange. But, if you own alternative assets like collectibles or fine wine, then it could take a significant amount of time before you find a buyer with knowledge, understanding, and appreciation for your particular vintage.
Still, for the majority of buy-and-hold investors, alternative assets can be a great addition to your portfolio. Many of them can provide you with mailbox money, tax benefits, and have little correlation with the stock market. Oftentimes, they’re stable which can improve your sense of financial wellbeing while also helping you achieve your financial goals!
Here are 5 types of alternative assets along with how you can start investing in each of them right now!
Traditionally, banks make loans to borrowers based on their credit scores and ability to repay them. However, many people and companies struggle to get approved for these loans. They may have businesses that are newly formed, are experiencing rapid growth, or don’t show enough money or income to qualify.
Private debt is an alternative asset class that fills the void that’s left by banks. Those who invest in it aren’t as interested in the borrower’s ability to repay as they are in the collateral that’s securing the loan.
Most private debt investors like to fund low LTV (loan to value) loans on real estate, vehicles, and business inventory. In turn, they receive passive interest income on a monthly, yearly, or lump sum basis once the loan gets repaid in full.
Many businesses that are now household names once got their start and built a cash runway using venture capital. Companies like Face Book, Uber, and Airbnb wouldn’t be as big or successful today if it weren’t for the initial investors who believed in and decided to take a chance on them.
Investing in private equity is somewhat like buying a stock. Each one gives you ownership in a company, but private equity and venture capital tend to focus on privately held and new companies. Oftentimes, these businesses haven’t proven themselves or become profitable which makes them more risky with low chances of success.
Yet, many people still choose to invest in these alternative assets because they’re passionate about the company or the cause. They believe in the product, see the need that’s getting filled in the market, and recognize the potential for enormous growth!
Most traditional assets get backed by pieces of paper that represent ownership in a company or its debt. They aren’t tangible or are something that you can hold.
Many commodities investors favor this alternative asset because their investment can be physically held and owned. For example, you can buy precious metals, corn, and lumber amongst a wide variety of other items that you can touch. But, sometimes this can come at a price. You may pay storage fees and other hidden costs for owning and taking delivery on some of these alternative assets.
The prices of most commodities tend to rise and fall with changes in supply and demand. Some will fluctuate as a result of geopolitical risk, too.
Take oil for example. Much of the world’s oil supply comes from the Middle East, which at times can be riddled with tension. If governments in this region aren’t cooperative or are facing conflict, then one country could extract oil in larger quantities to raise money which could cause prices to fall.
Historically, commodities tend to be a good hedge against inflation. In addition, most of them have a low to negative correlation with traditional assets.
The world’s largest and most common alternative asset is real estate. It includes housing, office space, and land to name a few.
There are many benefits to owning real estate. When it’s purchased right, it can provide you with passive income and equity – both of which help you build wealth and achieve financial freedom, faster!
Real estate operates in a more inefficient market than traditional assets, too. This gives you the opportunity to negotiate the price you pay which may allow you to buy at a discount!
Unfortunately, most people that buy real estate are homeowners. Oftentimes, they fall in love with a property and make an emotional purchase, believing it will be their biggest asset. When in fact, housing is most people’s largest monthly expense, a liability, and many times is not a smart investment at all!
It’s often said that beauty lies in the eye of the beholder. The same items that appear to be junk to one person, can be priceless to another and this is especially true in the world of collecting!
A collectible is any object that is valuable or interesting to a buyer. It can include antiques, artwork, jewelry, wine, cars, and even vintage Nintendo games! Typically, these alternative assets rise in value as time progresses and they become more rare.
Investing in collectibles can be profitable for those who have a strong passion and in-depth knowledge of a specific subject. But, it’s not for everyone. After all, you may need to spend a good amount of time learning before you’re able to buy, which helps ensure you’ll be getting the real thing and not a fake!
You should also be aware that many financial professionals don’t view collectibles as alternative assets at all. Instead, they see them as needless expenses that have almost no profit potential and a greater chance of being a complete waste of money!
Still, if you have a burning desire to learn and are passionate about a certain subject, then collectibles can give you a good return on your investment!
For the long-term investor, alternative assets can be a great way to grow your nest egg. They can help spread your financial resources out to more places while potentially offering large rates of return. But, it’s important to keep in mind that they do come with unique risks.
Before you buy any alternative assets, make sure you do your research and have a solid grasp of what you’re purchasing. Many times, these investments have limited regulation, nuances, and large fees which can be detrimental to your long-term goals.
You should steer clear of get-rich-quick schemes, assets you don’t understand, and others that are completely unproven. After all, simply avoiding money mistakes can be one of the best ways for you to amass your fortune and achieve financial success!
Which alternative assets are you going to invest in? Comment below.
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