5 Alternative Investments Recommended by Experts: How They Work and When to Invest

According to analysis from Security.org, cryptocurrency awareness and ownership levels have risen to record levels. 40% of American adults now own some form of digital asset, an increase from 30% in 2023. This means that Americans are looking for alternative investments instead of relying on a savings account or the stock market to grow their money.

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If you want to invest your money, you may have considered alternatives to traditional options to diversify your portfolio. In this article, we’ll explore the idea of ​​alternative investments so you understand what you’re getting yourself into.

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What is Alternative Investment?

Here’s what the experts had to say about alternative investments.

“Financial assets that don’t fit traditional categories, such as stocks, bonds or cash, are referred to as alternative investments,” said Steven Kibbel, CFP® and managing editor at InternationalMoneyTransfer.com. “These include art, collectibles, hedge funds, real estate, private equity, commodities (such as gold or oil) and even cryptocurrencies.”

It is worth pointing out that real estate is often called an alternative investment, although, according to data shared by the Pew Research Center, the primary residence takes an average of 45% of the total value of homeowners by 2021.

Kibbel pointed out that since these assets operate outside of the traditional market, they have lower regulatory requirements and may require more cash. You should keep this in mind as you work to diversify your portfolio.

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How Do Alternative Investments Work?

Kibbel noted that these investments work in different ways. Here is a breakdown of how alternative investments can lead you to financial returns:

• Real estate can be profitable through property appreciation and rental income if you can find a reliable tenant to cover your expenses.

• Energy resources and precious metals are often used as inflation hedges.

• Venture capital and private equity require you to invest in unproven business ideas with high growth potential, but they also come with liquidity risks.

• Hedge funds use sophisticated techniques such as arbitrage and leverage to target disproportionate returns to investors.

• Cryptocurrencies are highly risk-resistant due to their high volatility and reliance on blockchain technology.

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What is the Best Alternative Investment?

These are the best alternative investments worth investing in, according to experts.

Buildings

According to Kibbel, real estate, with its potential for inflation protection and stable income, can be one of the best alternative investments.

Private Equity/Venture Capital

Private equity can provide significant returns if the investee company goes public or is acquired.

Kibbel explained, “If you back the right startup, capital can be very successful, but there is a big chance of a complete loss.”

Product

Kibbel noted that during market downturns, commodities, especially gold, continue to be a reliable option for high investment returns.

REIT

“If one wants to achieve real estate class and maintain liquidity, Real Estate Investment Trusts (REITs) can be a good fit,” said Robert R. Johnson, PhD, CFA and professor at the Heider College of Business, Creighton University. “REITs can be a great way to add this asset class to an investor’s portfolio.

Most REITs are diversified, and you get ownership of many different properties. REIT returns can be more stable than other options since they trade like stocks.

Collections

Collectibles such as rare cars, wine or artwork can increase in value over time for people with special hobbies, but they are illegal and require more research to make sure you know what you’re getting into.

What about Cryptocurrency?

Johnson shared concerns about cryptocurrencies.

“To even refer to them as currencies is misleading, as one of the basic characteristics of a good currency is stability of value,” he said.

Although cryptocurrencies are becoming a more popular investment option, Johnson emphasized concerns about how one cannot use traditional financial tools to access the real value of assets. Most experts will agree that allocating money to cryptocurrency is more speculative than investing.

Johnson added, “Funds don’t produce anything, which Warren Buffett eloquently explained at Berkshire Hathaway’s Annual Meeting in May.”

When is the Right Time to Invest in Alternative Investments?

When does it make sense to invest in alternative assets?

You Should Evaluate Your Own Situation

“Consider your time horizon, liquidity needs and risk tolerance when deciding whether alternative investments are right for your portfolio,” Kibbel said. “Compared to stocks or bonds, these investments can be more difficult to sell quickly and often require long-term commitments.”

You should evaluate your personal situation because you do not want to invest the money that you will need for any future expenses in alternative assets because there is no guarantee that you will be able to collect your income in time. You also don’t want to risk money you can’t afford to lose so you don’t put yourself in a compromising position.

You are an Experienced Investor

Kibbel shared that alternative investments may be suitable for you if you are an experienced investor looking for high income or diversification. You should also be at a stage in your investing career where you can accept a higher level of risk and less control. If you’re new to investing, you’ll want to ease into your path instead of jumping into cryptocurrency or collecting art.

When You Need Liquid Cash for Short-Term Goals

“From a risk perspective, alternative investments are viewed by many as good vehicles of exchange because their returns are often not closely related to returns from stocks and bonds,” Johnson said. “The biggest problem with alternative investments is that they are often not as liquid as traditional investments.”

Before investing in illegal and risky assets, you should know your financial plan and how quickly you want to get your money. The main issue with most alternative investments, such as private equity and real estate, is that your money can be compounded for a long time before you see any returns.

Experts agreed that you should do thorough research before investing in any alternative asset, especially when dealing with more complex and speculative options such as equity or cryptocurrency.

Johnson concluded, “For the vast majority of individual investors, alternative investments are not necessary or appropriate.”

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