Diversifying an investment portfolio means not putting all your investment dollars into the same asset.
Some people view a few dozen individual stocks as a diverse investment portfolio. Others want to buy broad-based index funds that represent entire stock markets. And others want bonds, stocks, and cash to keep their portfolio from having too much volatility.
However, diversification can go beyond typical financial assets. Some investors may turn towards alternative investments to augment their portfolios.
Although "alternative investments" are often described as a single group by financial advisors, this asset class represents a diverse array of investment opportunities. But which alternative investments are most popular? Keep reading to find out!
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What Are Alternative Investments?
Alternative investments are typically any investment that isn’t cash, a publicly traded stock, or a bond. ETFs and mutual funds are typically made up of stocks and bonds, so these assets are considered mainstream. But virtually all other assets are considered “alternatives.”
Alternative investments can be as well known as publicly-traded REITs or as esoteric non-fungible tokens (NFT). Some of these assets produce cash flow, others offer a stable long-term store of value. Others are speculative but may produce 100X returns on investment over time.
Some people buy alternatives simply for diversification. Others are looking for non-correlated returns to compliment other areas of their portfolio. Or others are just excited about the sector (say crypto of collectables).
The 8 Most Popular Alternative Investments
Below, we break down 8 of the most popular alternative investments available today. It’s important to understand each of these options before diving into them. Here's what you need to know.
1. Real Estate
Real estate is probably the best-known and most popular alternative investment. Most real estate investments aim to provide steady cash flow proportional to the value of the investment.
A few real estate investments focus on growth. These investments focus on “hot” markets where the value of property in the market is increasing rapidly. A few real estate investments focus on buying and selling in these hot markets. And investment managers (or investors themselves) often use funds to build (or rehab) and sell properties.
Real estate investments can include the following:
Aside from the investments listed above, investors may buy mobile home parks, campgrounds, shares of developments, and more. Again, it's important to do your research before buying any type of alternative investment.
Infrastructure investments are an offshoot of real estate investments. They involve the ownership of certain real property that produces value. For example, an investor may own an oil rig, part of an oil pipeline, a cell phone tower, and more.
Real estate investors may be able to invest in these through private REITs. Or they may be able to buy them directly via a Master Limited Partnership.
Much like real estate, debt investing is one of the most popular alternative investments because it's designed to spin off cash flow over time. Investors who buy debt expect an entity to repay a loan (including interest) over time. Debt investing can include the following:
4. Private Business
Private business investments involve buying shares of non-traded companies. While this is risky (a lot of companies can go bust before having a buy-out) some can have huge exits. And many people with experience growing their own companies choose to invest in other private businesses. This allows them to serve as an advisor and help the business grow.
Private business investing can include angel investing which means providing the first financial investments to a fledgling company. It can also include venture capital investments which involve subsequent investments for more mature businesses. If you’re looking to invest in private businesses, SeedInvest, Mainvest, and SMBx are three popular platforms.
5. Precious Metals
Precious metals include assets such as gold, silver, platinum, and more. These can be coins with a “numismatic” value or simple bullion (typically stored as bars). Precious metals are popular alternative investments because they're often touted as non-correlating assets (although this depends on the rest of your portfolio).
Typically precious metal investors want to be the direct owner of these assets rather than simply owning an ETF that tracks the value of the metal. This is because they usually want to know that their investment could be used in times of hardship.
Lower cost precious metals such as buying silver bullion may be the lowest cost place to start. But investors can also buy gold or other higher-cost metals. Vaulted in a platform that allows you to buy gold from an app!
Cryptocurrency involves any blockchain-enabled digital token that investors can use as a store of value. Bitcoin, the original cryptocurrency, was designed to be a stable store of value similar to gold or silver. The founder (or founders) envisioned a world in which cryptocurrency promoted competition and transparency among government-backed currencies.
Thanks to outsized demand for cryptocurrency, crypto doesn’t get circulated the same way that fiat currencies do. Many people buy and hold cryptocurrency, which leads to growing prices over time (even though the amount of tokens increases over time).
Although cryptocurrency is all the rage right now, investors should be careful about security risks, volatility, and potential long-term losses before choosing it. Right now, these are the top cryptocurrency investing sites.
Commodities are investments that are bought and sold through exchanges at set prices. The most common commodities are crops (such as wheat or corn), energy (especially oil), and precious metals (previously discussed). Commodity investing can be complex, especially because it involves the “futures” market where the future value of a commodity is being compared.
Funny as it sounds, commodity investors don’t necessarily own barns full of crops or a rig full of oil. They may do all their investing digitally, ensuring that supply meets demand and making a profit as the “middle man.”
Investors can buy commodity funds through publicly-traded mutual funds and ETFs. Commodity funds may have volatile pricing in the short term. But they tend to be decent inflation hedges in the long run.
8. Fine Art And Collectibles
Fine art and other collectibles are difficult to value assets because they're all "one-of-a-kinds." The value of Mickey Mantle’s rookie card is entirely driven by demand, as is the value of an original Picasso or any other collectible.
Fine art and collectibles have always been popular alternative investments. But, historically, only the ultra-wealthy or the ultra-lucky were able to nab some of these high-value items.
However, financial technologies are making it easier for small investors to buy “shares” of these high-value items. Masterworks is one of the first apps to open up fine art to Mainstreet investors. Collectable does the same for sports memorabilia.
The alternative asset class is full of investment options that few investors have seriously considered. But in the digital age, it's now easier than ever to find popular alternative investments that meet your needs.
However, alternative investments are "alternative" for a reason. They don’t fit neatly into certain criteria. And it can be difficult to predict how they'll perform. Investors should be prepared for the possibility of low liquidity or returns when they invest in alternatives.
Ultimately each investor must decide whether alternatives should be part of their portfolio. If you'd prefer to stick with more familiar assets like stocks, bonds, and funds, be sure to check out our favorite online stock brokers and robo-advisors.
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared toward anyone wanting to earn more, get out of debt, and start building wealth for the future.
Editor: Clint Proctor Reviewed by: Chris Muller