Most investor portfolios are made up of three key ingredients: equity assets (like stocks), fixed-income assets (bonds), and cash or cash equivalents, like money market funds. Any other asset is lumped into the catchall “alternative asset” category.
What are alternative assets?
Alternative assets are investments that aren’t typically included in traditional investment portfolios. Alternative assets include real estate, cryptocurrencies, commodities, art, options, futures, forex, NFTs, peer-to-peer lending and venture capital. Alternative assets tend to be riskier than traditional assets.
Buying gold or other precious metals? That’s an alternative investment. Putting money into your brother’s new business for a cut of future profits? Purchasing employee shares in your pre-IPO company? Pumping thousands of dollars into a mint stamp, coin or vinyl record collection? Buying bitcoin? All are examples of alternative assets.
Why invest in alternative assets?
Interest in alternative asset investing — or “alts,” as industry people say — has grown since the financial crisis, as investors seek greater diversification into assets that don’t track the performance of stocks and bonds.
Alternative investments can be a powerful way to diversify a portfolio, but carry much higher risks and turbulence in value.
Gold, for example, is considered by some people to be a recession-friendly investment. When the stock market has a big pullback, the price of gold often goes up. But when 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 significantly outperformed gold.
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Types of alternative assets
Pretty much anything that isn’t a stock, bond or cash can be categorized as an alternative asset. Here are a few of the most popular.
1. Real estate
Real estate investing is purchasing property to generate income, rather than to be used as a residence. That can be buying a property to earn rental cash or buying shares in real estate investment trusts, which invest in companies that finance or run commercial properties. Investors can purchase publicly traded REITs through an online broker.
2. Bitcoin and other cryptocurrencies
Cryptocurrencies are digital assets and cash traded through peer-to-peer lending. Bitcoin is the highest valued cryptocurrency, or a form of digital cash.
The spot price for Bitcoin broke $50,000 for the first time Feb. 16, 2021, drawing a great deal of interest from investors. Here’s more on what Bitcoin is and how it works.
Cows, corn, oil, gold or other essential raw materials that are grown or mined are commodities, and buying and selling them can be risky because the price can widely fluctuate for a variety of reasons. A drought can raise the price of corn, or a decision by the Organization of the 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.
Art is a tricky sector to invest in. Tastes change over time and it’s difficult to pick out who will be the next Banksy. If you love a particular piece of art and would like to hold onto it for a long time that is different than spending a lot in the hopes you’ll be able to sell it for more one day.
Trading options requires buying or selling an asset at a pre-negotiated price by a certain date. Options trading is an advanced investment strategy, and opening an options trading account is a bit more involved than opening a standard investment account.
Futures are derivative contracts to buy or sell an asset at a future date at an agreed-upon price. Trading futures contracts is highly speculative and comes with a fair amount of risk.
Forex trading refers to buying and selling currencies from around the globe. For example, if you think the Euro will rise and the U.S. dollar will fall, you could buy Euros and sell U.S. dollars.
NFTs, or non-fungible tokens, are unique digital asset numbers that show ownership of digital content such as images, videos and music. NFT owners don’t own exclusive rights to the content, but you can trade or sell NFTs.
9. Peer-to-peer (P2P) lenders
P2P lenders allow private investors to invest cash in nonbank companies that give commercial and personal loans. With P2P loans, there is always the risk that the borrower won’t pay the money back.
10. Venture capital
Venture capital is where investors fund startups in exchange for an ownership stake in the business. Venture capitalists help the companies expand by providing financial support.
How to invest in alternative investments
A growing number of online brokers offer trading in alternative assets or funds linked to them. But for some alternative assets, you need to buy directly from money managers and wealth management firms. That will carry higher fees, which will vary depending on the asset.
Regulations are less commonplace than in more traditional forms of investment like stocks and bonds, and the amount of public information to assess the value of the asset can be murkier. Knowing the market and potential risks for any alternative asset class will likely require more homework (and guesswork) for the consumer.