With the steady gains in the financial markets, particularly stocks, alternative investments haven’t gotten much love – or attention – in the past decade or so. Or at least not from the average investor. After all, who wants to sink money into what are essentially speculations when you can earn predictable double-digit returns in index funds?
But as it turns out, certain alternative investments have been providing handsome returns, though they’ve hardly been front-page news. Most are known only to wealthy investors. But in recent years, with the advantage of crowdfunding, many of these alternative investments are now available to the average investor.
With uncertainty dominating the financial markets for most of 2020, alternative investments may deserve a closer look. That doesn’t mean shifting your entire portfolio into alternatives, but rather dedicating a small allocation to a few you find compelling.
What are alternative investments?
Alternative investments are any type of asset that isn’t widely recognized by the general investing public. They typically include participation from only a small number of generally wealthy investors but do go through times when they reach near mainstream levels of attention, if not participation.
A good example, and one we’re not going to cover here, are precious metals. Most of the time precious metals are flat, which is largely why they’re ignored. When they do experience impressive price spikes, as interest in precious metals reaches mania levels, prices often move to record levels. But interest typically fades quickly thereafter, as prices undergo debilitating and prolonged declines.
More generally, I can say that alternative investments are those asset classes that aren’t common. For example, investors typically hold their portfolios in stocks, bonds, real estate (mostly as a primary residence), and bank-related investments. Nearly any asset class that doesn’t fall within these broad groups is generally seen as an alternative investment.
As you’ll see in the descriptions below, alternative investments can cover asset classes as exotic as classic cars, fine art, and even wine, and widely recognized alternatives like cryptocurrency and real estate crowdfunding.
Why invest in alternative investments?
The main reason anyone would want to invest in alternatives is the potential to earn higher returns than those possible on traditional investments. Adding just a small allocation of a certain alternative or two has the potential to boost the overall return on your portfolio.
But perhaps a bigger reason to invest in alternatives is holding asset classes that will increase in value – or at least maintain it – during times when traditional investments are in decline.
For example, while stock and bond prices tend to move in tandem, it may be possible to offset a general decline in those financial assets by diversifying a portion of your portfolio into alternatives, like precious metals, cryptocurrency, and shorter-term real estate investments.
One of the most basic qualities of alternative investments is that they tend to perform well even when financial assets are misbehaving. And sometimes, alternative investments outperform financial assets even when stocks and bonds are in bull markets.
Cryptocurrency is a term used to describe digital currencies. These are currencies that exist only on the Internet and are not backed by any government or central bank. They were originally designed to be a payment transfer system between individuals and businesses that would transcend international borders, and operate completely outside the banking system.
But in recent years, it seems the speculative value of cryptocurrency has taken center stage. There’s even a rising belief cryptocurrency may be replacing precious metals as the ultimate disaster hedge.
That belief is not without basis. In this tumultuous year of 2020, Bitcoin – the most popular crypto and the bellwether for the entire group – has risen in value from $7,175 on January 1, to the current level of $13,885. That’s an increase of about 93% (through October 30th) while the S&P 500 has been virtually flat over the same period.
If you want to invest some money in Bitcoin or other cryptos, you’ll need to familiarize yourself with how it works. But there are brokers available where you can trade cryptocurrencies in much the same way you would stocks and bonds.
Robinhood is a great example. Not only were they one of the first trading platforms to roll out commission-free trading of stocks, but they also offer trading in cryptocurrencies. That means you can hold cryptos on the same platform where you invest in stocks, options, and ETFs.
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Another platform to keep an eye on is Webull. Much like Robinhood, it’s an investment app where you can trade stocks, options, and exchange-traded funds commission-free. But they expect to roll out trading of cryptocurrencies in the near future. Stay tuned.
Classic cars are probably THE most specialized – and speculative – of alternative investments. To have any chance of investing profitably in classic cars you’ll either need to be an expert on the subject or have a close friend who is and is willing to share his or her knowledge with you.
A classic car can fetch a high price for different reasons. One may be because it’s a limited edition. Others can be due to the car winning a major race, being owned by a celebrity or royal at one point, or even appearing in a famous movie. Still, others may have high value because they are in excellent condition and only a few from the original batch still exist.
In 20 Vintage Cars That Are Worth a Fortune, MSN reports the sale of a 1967 Ford GT40 Mk IV for an incredible $1.93 million. One of the factors that made it so valuable was that only 12 chassis for the car were ever built – which goes to show how fine the fine points are with classic cars.
In another example, a 1958 BMW 507 Series II fetched $2.75 million. The car was beautifully restored to its original condition.
Unfortunately, there are no classic car crowdfunding platforms or exchange-traded funds where the average investor can participate in the classic car market. You’ll need to be ready to purchase a vehicle directly, which will require a large amount of cash in addition to very specialized knowledge.
Fine art is an investment held almost exclusively by the wealthy. There’s a good reason why they hold it, too. A unique work of art will increase in value over time, if for no other reason than inflation. But the older a piece of fine art is, the more valuable it is, because work from that particular artist becomes increasingly rare, as pieces either deteriorate, are destroyed, or mysteriously disappear.
The returns on fine art are inconsistent, but they can be dramatic on certain pieces and particularly with specific artists.
Luckily, you no longer need to be wealthy to invest in fine art. A service known as Masterworks now gives ordinary investors a way to purchase shares in fine art from some of the most famous painters in history. Since they know the art market, they purchase paintings only if similar works have shown a historical appreciation rate of between 9% and 15%. In other words, the people behind Masterworks are your experts.
You can invest in shares of various paintings at just $20 a share. Masterworks does not have specific minimum investment amounts. Minimums vary depending on the specific investment offerings available at the time of your investment. However, that small amount of money could be spread across 50 different pieces of fine art.
Fine art is a true speculation, but there is an obvious reason the wealthy have been invested in it for centuries. Now you have a chance to do the same.
Real estate crowdfunding
What makes real estate crowdfunding an alternative investment is not the base investment itself – real estate – but the completely unique way you invest in it.
You’ll have an opportunity to invest in commercial real estate, which includes office buildings, retail space, industrial properties, and large apartment complexes. Real estate crowdfunding can offer investments either through real estate investment trusts (REITs) or directly in individual properties. For individual properties, you’ll have an opportunity to either invest in a high-interest financing arrangement or take a direct equity stake in the property.
One potential obstacle to be aware of is an accredited investor requirement. There are now dozens of real estate crowdfunding platforms available, some of which require accredited investor status and others that don’t.
To qualify as an accredited investor, you must meet one of the following requirements:
- Have earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year.
- Have a net worth of over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).
If you don’t meet those requirements, you can still invest in real estate crowdfunding, though you’ll need to do it through a platform that does not require accredited investor status.
Below are examples of some of the top real estate crowdfunding platforms that can accommodate both accredited and non-accredited investors.
Fundrise is a real estate crowdfunding platform that does not require accredited investor status – anyone can invest. The platform has included participation by more than 130,000 investors, with over $79 million paid out. And perhaps best of all, you can invest with Fundrise with as little as $500 or $1,000. Meanwhile, annual returns average between 8.7% and 12.4%, with returns paid out quarterly.
When you invest through Fundrise, you’ll be holding pieces of loans made to buyers of commercial real estate. Those include apartment buildings and office buildings, which are two very profitable investments historically reserved for institutions and the wealthy. This will be your opportunity to participate in a lucrative real estate investment class with a very small investment.
Crowdstreet is available to both accredited and non-accredited investors. Funds that invest in commercial real estate are available for non-accredited investors, while individual property deals are open only to accredited investors. Specific annual returns are not available due to the unique nature of Crowdstreet individual investments.
The minimum investment is $25,000, and the typical commercial real estate investment has an expected payout of between two years and five years. This makes it an intermediate investment, so you’ll need to allow your money to remain invested for the duration.
RealtyMogul also invests in commercial real estate. It includes participation from 200,000 investors in 400 commercial real estate projects, paying out over $160 million in distributions. They accommodate both accredited and non-accredited investors and offer investments in real estate investment trusts (REITs), individual properties (called “private placements”), and tax-deferred exchanges known as 1031 exchanges.
You don’t need to be an accredited investor to invest in a REIT, which will require a minimum investment of $5,000. However, you can invest in either 1031 exchanges or individual properties as an accredited investor. Those will require a minimum investment of between $15,000 and $50,000.
Wine is certainly one of the most unusual alternative investments there is. Select vintage wines from specific geographic regions and years have provided outstanding annualized returns. For example, the website Decanter.com recently reported a (year) 2000 Bordeaux wine, Lafite Rothschild, currently sells for 578% above its original price. That’s a nearly six-fold increase in price in just 20 years.
But investing in wine is highly specialized. If you want to give it a try, check out a service called Winc. It’s a personalized wine club that’s been around since 2012, which means it mostly helps you to identify and purchase preferred wines. But it also gives you an opportunity to invest in your favorite wineries. You’ll do that by buying shares in a particular winery, at a price of $1,000 per share. Depending on the size of your portfolio, you can potentially invest in several wineries.
Investing in wine is certainly not for everyone. But if you have a good understanding of the wine market, you may be able to invest in profitable wineries, as well as purchase what you believe will be individual wines with substantial future price appreciation.
This is an alternative investment category that probably not more than one in 100 people have ever considered. But it turns out to be one of the most lucrative.
Seeking Alpha has reported that farmland has outperformed virtually every other asset class, including stocks, bonds, real estate, and precious metals.
That doesn’t mean you need to go out and buy farmland to cash-in on this investment. You can participate through farm-related real estate crowdfunding platforms instead.
For example, AcreTrader is a platform that allows you to buy shares in parcels of farmland. You can choose the farms you want to invest in and since you’ll only be purchasing a slice of each farm, you can spread your investment across several farms. Income will be earned through a combination of rents collected on the land (since many farmers rent the land they farm on) and capital gains on the eventual sale of the parcels. Investments range between as little as $3,000 to as much as $10,000, with a typical investment expected to run between five years and 20 years.
Like many higher risk real estate crowdfunding investments, AcreTrader does require you to be an accredited investor.
Another example is FarmTogether. It works similar to AcreTrader in that you can earn returns from both rent on the land and capital gains upon sale of the property. The company targets returns of between 8% and 15% per year, including annual cash yields. The minimum investment required is $10,000.
You won’t be purchasing the land directly, but buying it through an interest in an LLC that owns it. That means you’ll be a fractional owner of a particular parcel of farmland. You’ll be able to choose which parcels you want to invest in. As you might expect, FarmTogether also requires accredited investor status.
More non-traditional ways to invest in traditional investments
Just as real estate crowdfunding is an alternative way to invest in a traditional asset class – real estate – there are other ways to invest in traditional investments through non-traditional means.
One example is a platform called Worthy Bonds. With an investment as low $10, you can invest in 36-month bonds paying 5% interest to investors. The bonds are offered through Worthy Peer Capital, and are not FDIC insured. That means you can lose money if these investments fail. However, at 5% interest, you’ll get a fixed return higher than you can get on just about any other interest-bearing investment.
If you are an accredited investor, there’s no limit on how much you can invest in the bonds. But if you are not accredited, you’ll be limited to investing no more than 10% of either your annual income or your net worth. Worthy Bonds are available for both taxable investment accounts and IRAs. They’re not a substitute for CDs or bonds, but a small allocation can increase the return on your fixed-income portfolio.
If you’re a beginner investor looking to get into self-directed investing, you should check out an app called Public. You can download the app free, trading is commission-free, and it will give you access to trading among more than 5,000 stocks in real-time. Since they allow you to invest in fractional shares – small slivers of whole stock prices – you can build a well-diversified portfolio of some of the biggest companies with just a few hundred dollars.
But there’s significance to the name “Public”. The app has a large community forum where traders can ask questions and share experiences. That social aspect of the platform will provide you with a support community, as well as opinions and answers to your investment questions.
The risks of investing in alternative investments
Now that I’ve gone over a variety of alternative investments, it’s time to talk a little more in-depth about the significant risks that may come with some of them. Though I refer to them as alternative “investments”, closer to the truth is that they’re speculations – not true investments. That virtually guarantees extreme price volatility, making the likelihood of losing money at least as great as the potential to make it.
Stocks and bonds tend to have relatively stable long-term performances. Though they experience bear markets fairly frequently, they always bounce back and reach new highs. The level of participation, by tens of millions of investors, contributes to this performance stability.
Alternative investments, on the other hand, have no such recognized status. Either the market of potential investors is very small, or they go through times of explosive price increases, followed by crushing declines in value. Those declines keep the crowds out.
Get in at the right time, and yes, you can make a killing. But get in at the wrong time, and you can lose your entire investment.
A big part of the problem for the average investor is a lack of knowledge. Let’s face it, though there is abundant information available about financial assets on the web, TV news, and thousands of books, far less is available about most alternatives. That lack of knowledge dramatically increases the level of risk you take on with alternative investments.
That’s why it must be stressed that if you decide to participate in alternative investments, your total commitment should be no more than 10% or so of your entire portfolio. That will give you the opportunity to cash-in on big gains, while limiting your downside risk if the alternative investment goes against you.
As you can see, not all alternative investments even look like investments. But many have still provided returns to investors that have outpaced traditional financial assets. Holding just a small percentage of your portfolio in one or more of these alternative investments could increase your long-term returns, particularly during prolonged bear markets in stocks and bonds.