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Alternative investments are a great way to diversify your investment portfolio and minimize the risk you assume when investing. These investments are anything other than the three traditional asset classes–stocks, bonds, and cash. This means that you can invest in alternative investments like real estate, cryptocurrency, angel investing, and precious metals, just to name a few.
But not all alternative investments are created equal. In fact, some alternative investments will likely lose your money, so you need to be smart about which investments to choose when you’re just getting started.
This article discusses the best alternative investments you can invest in this year to generate consistent and stable returns while minimizing the risk you assume as an investor.
You may be wondering what the definition of an alternative investment is. Well, an alternative investment is any type of investment that doesn’t fall into the category of stocks, bonds, or liquid cash.
Alternative investments have been popular (and sometimes controversial) for some time. Investments like precious metals and gold have been debated by investors for years on their effectiveness and appeal as investments and whether or not they hold their value better than traditional investments.
This broad definition means that alternative investments can apply to any type of investment. Things like luxury watches, cars, fine art, wine, and other collectibles are all classified as alternative investments.
However, not all alternative investments are beneficial for investors. Real estate and angel investing tend to be the most popular alternative investments in the United States, although this may be different in other countries.
Alternative investments provide a host of potential benefits for those that choose to go this route. Below are some of the top benefits of alternative investments.
Diversification has become a sort of buzzword in the field of finance. Every financial planner talks about diversifying your investments, but what does that really mean?
Using alternative investments for diversification is ideal since these investments expose you to different asset classes so you don’t have to put all your eggs in one basket.
Diversification is important because, at times, the stock market may experience periods of large losses where your investments will decrease in value.
The reason you would want to diversify is because, when this happens, you’ll have other investments in asset classes that hold their value or even increase when the stock market experiences downturns. Instead of your entire portfolio suffering, only a small percentage of your assets are affected when you are properly diversified.
There are also plenty of tax benefits that come with alternative investments. For example, you’ll get pass-through depreciation and favorable capital gains treatment that can save you thousands on your taxes at the end of the year.
Alternative investments are also able to be invested within traditional retirement accounts like 401(k) and IRAs. Using alternative investments in tax-advantaged accounts can increase your nest egg when saving for retirement.
There are a lot of alternative investments that provide consistent cash flow for investors. Things like real estate investment trusts (REITs) are known for providing cash flow for their shareholders that can outperform many other traditional investments. Alternative investments have better cash flow than investments like CDs or bonds ever will.
Traditional investments often have the highest volatility and pay the lowest dividends in market downturns. That’s why it’s so important to use alternative investments since they are less volatile and tend to hold their value better than stocks and bonds.
Alternative investments aren’t tied to a certain company’s performance like stocks. Random events like hurricanes, oil spills, and other natural disasters can impact a company’s performance and affect the price of its stock. Nearly all alternative investments act the opposite way and aren’t affected by one individual factor.
While alternative investments provide plenty of benefits, there are some drawbacks to consider before you buy your next investment and expect it to increase in value.
Alternative investments in things like real estate, watches, and private equity are typically illiquid assets, meaning that they don’t convert to cash as easily as other investments like stocks.
Let’s take an example. Real estate tends to be one of the best alternative investments for beginners, so let’s say you bought an investment property in 2020 for $250,000. In a number of different circumstances, you may need to sell the home on short notice due to a death in the family, job situations, and natural disasters. Those that need to sell quickly sometimes wait for months in order to convert the real estate to cash–making it a highly illiquid alternative investment.
Alternative investments are different from stocks since their fee structures vary. Fee schedules in things like mutual funds and index funds are public and you know exactly what you’re paying as an investor. Alternative investments like cryptocurrency and REITs have different regulations and their fees tend to be higher than stocks.
Alternative investments like gold, silver, and precious metals require the owner to store the assets in a safe place. Additionally, transporting precious metals can be difficult and risky depending on how far the precious metals need to travel. Traditional investments like stocks are bought and sold digitally and you don’t need to consider storage issues.
While sometimes having less regulation is better, in the case of alternative investments, there may be too little regulation in some industries. Alternative investments like cryptocurrency are still emerging and don’t have the same regulations as the financial services industry.
Are you looking for the best alternative investments to make more money this year? Below is our list of the top alternative investments that you can start to accumulate wealth outside of the stock market.
Real estate investors who find properties to rent out to tenants have the potential to make passive income on each unit that they manage. With the generous financing terms available to real estate investors, you can quickly accumulate several rental properties that pay you consistent rental income each month.
Consistent monthly income. Having predictable monthly income is one of the best ways to grow your income and net worth over time. Rental property investing allows you to rent out your property to tenants for a monthly fee. As long as your tenants are happy, there isn’t much else you need to do in order to make consistent monthly income with rental properties.
Becoming a real estate investor. Rental property investing is how most real estate investors get started. Once you master rental properties, some real estate investors go on to buy and sell commercial real estate which has the potential to provide better returns than rental properties.
Low-risk investments. Rental property investing is considered one of the safest investments available since it is consistent and sustained over a long-term period, unlike many other investments.
Scalability. Rental property investing has the potential to scale. Once you acquire your first rental property, it tends to be very easy to acquire your next several ones, and before you know it, you have several rental properties in your portfolio generating stable monthly income.
Rental property investing tends to be a great option for those that want to launch a career in real estate investing. However, rental property investments come with several downsides, including:
They require active management. Unless you hire a property manager, you’ll need to manage your rental properties yourself. As a landlord, you’ll need to fix any issues with the property to ensure your tenants are happy and they have a comfortable living space. When something goes wrong at 3 am, you’ll be on call to make sure it gets taken care of.
It can be expensive. There are plenty of expenses that come with owning a rental property. Large expenses like replacing the roof, fixing toilets, and remodeling kitchens can add up and be too much for new real estate investors.
Potential for bad tenants. We’ve all heard horror stories about bad tenants who destroy their property and leave landlords frustrated and with nowhere to turn. A bad tenant can cause legal issues by harming the safety and well-being of your neighbors and you may be held responsible for their actions. You should do plenty of screening before you rent your home to a new tenant to ensure they will abide by the rules.
Angel investing is a form of private equity where a single investor takes an equity stake in a startup company.
Some of the most well-known examples of angel investing are found in the technology industry. Nearly all tech companies got their start from a form of angel investing or venture capital that enabled them to grow at a rapid pace and scale their user base. Companies like Facebook, Airbnb, and Dropbox all used angel investors to grow their businesses in the early days.
Angel investing comes with plenty of benefits for those that choose to get involved with angel investing. First, angel investors have the potential to make a lot of money with their investments. Since angel investing is often very risky, investors can generate outsized returns if the companies they invest in get acquired or go public.
Angel investors enjoy tax benefits as well. Depending on the structure of the company and the returns they generate, angel investors may be able to use losses or business expenses to reduce their income at the end of the year.
Angel investing can be a good option for some investors but may not be a great fit for everyone. To be an angel investor, you may need to meet the requirements of accredited investors, which means you must make over $200,000 per year or have a net worth of over $1 million.
Angel investing is also one of the riskiest investments available today. Since most new companies end up failing in the first several years, most angel investments go to zero and investors never get their money back. However, the one or two companies that get acquired or go public make up for all the investments that fell flat.
Another disadvantage of angel investing is that the investment is highly illiquid. Investing in a company to fund purchase orders, inventory, or office space means you won’t be able to get that money back in the near future. The only way that you can get a return on your investment is when the company makes money or receives money from other investors.
Precious metals include gold, silver, platinum, and other metals that are found deep within the earth. These precious metals have been collected by people for thousands of years and continue to generate interest among the investing community. But do these investments ever pay off?
Benefits of holding a physical asset
Precious metals tend to hold their value
Better liquidity than other alternative investments
You must deal with storage issues
Precious metals are finite resources and will run out eventually
They can take up a lot of space
They aren’t as popular as they once were
Cryptocurrency (or just crypto) involves investing in one of the popular cryptocurrencies available on the blockchain network. Cryptocurrency investing has exploded in recent years but is subject to extreme volatility and quick changes in the market
Potential for big gains. Some cryptocurrencies can skyrocket in value in a short amount of time. Those who invest in cryptocurrencies can have big gains in a matter of a few hours.
The currency of the future. Cryptocurrency is said to replace physical currency within the next several decades. Owning cryptocurrency means your holdings will likely increase in value and you may be able to buy more assets with it in the future.
Highly speculative. Cryptocurrency is one of the most speculative investments in the world.
Volatility. It’s not uncommon for cryptocurrencies to experience big losses and extreme volatility. These markets are so unpredictable and you may find that your gains are wiped out within a few short days.
The best alternative investments aren’t always the ones you may think of off the bat. Investments like real estate, cryptocurrency investing, and rental properties have many benefits that you should consider if you want to get started with alternative investing this year.
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