You’ve probably heard of alternative investments, but what exactly are they? In short, alternative investments are any asset class that falls outside the traditional categories of stocks, bonds, and cash. These investments can include everything from private equity to rare coins and art. Still, they all have one thing in common: they offer the potential for higher returns than traditional investments.
So, why would you want to invest in something that isn’t stocks, bonds, or cash? For one thing, alternative assets tend to be less volatile than traditional ones. That means they may provide a steadier stream of returns over time. And because they’re not as widely held as stocks and bonds, they can offer the potential for higher returns. Of course, that also means there’s more risk involved. But suppose you’re comfortable with a little extra risk and looking to diversify your portfolio. In that case, alternative investments could be a good option for you.
Types of Alternative Investments
Now that you know what alternative investments are, take a look at some of the most common types.
Private equity is when you invest in a company that isn’t publicly traded on an exchange. In other words, it’s impossible to buy company shares through a broker. Private equity firms usually raise money from institutional investors like pension funds and insurance companies. Then they use that money to buy stakes in companies, finance management buyouts (MBOs), or leveraged buyouts (LBOs).
Returns from private equity tend to be high, but so is the risk. Because these investments are often illiquid, it can be hard to cash out your stake in the company if you need to. And since private equity firms often borrow money to finance their investments (leverage), a small drop in the value of their portfolio can cause significant losses. There are many private equity firms to choose from, so it’s essential to do your research and find one that aligns with your investment goals.
Real estate is when you invest in property. That could mean buying an apartment building, a storage facility, or even vacant land. Real estate has historically been a very stable asset class. It tends to hold its value well during periods of economic turmoil. Plus, it can generate income through rent payments from tenants.
However, you’re also taking on many risks with real estate investments. That’s because property values can fluctuate greatly, and it can often take a long time to sell, especially in areas that aren’t experiencing rapid population growth. On the bright side, getting started with real estate investments is easier than other alternative assets, and there are many ways to get involved. For example, you can buy a single property and then manage it yourself. Or you could invest in a real estate investment trust (REIT) that pools investor money to purchase properties across the country.
Venture capital is when you give money to a startup company for an ownership stake in the business. Venture capitalists typically invest early in a company’s development in exchange for equity and usually only invest in businesses with high growth potential. Because these companies are young and unproven, many risks are involved. The risk can range from the entrepreneur’s ability to execute their business plan to whether there will be a market for their product or service.
On the other hand, venture capitalists enjoy much higher returns than traditional investments. So it can be worth taking on some risk in exchange for a potentially big payoff. The type of companies financed by venture capitalists can vary widely, from tech startups to biotech companies to restaurants. That’s why it’s essential to do your research and find a venture capital firm that aligns with what you’re looking for in an investment.
Along with these more traditional alternative investments, there are also many “tangible“ assets that you could invest in. This includes things like art, collectibles, gems, and jewelry. One of the most popular ways to invest in tangible assets is through a gold or silver exchange-traded fund (ETF). These ETFs allow you to invest in gold and silver without buying coins or bars. Instead, you can buy ETF shares that are tied to the price of actual physical gold or silver. This can allow for more convenient trading because you don’t need a safe or other storage facilities for your precious metals.
Another way to get involved with tangible assets is by buying classic and collectible cars. These cars, whether in original or restored form, are great examples of tangible investments because they have easy-to-see and understand real-world value. This can be especially appealing for car enthusiasts who want to take their hobby further by investing in classic car restoration parts and accessories.
Alternative investments aren’t for everyone. But if you’re willing to take on a little extra risk for the potential of higher returns, they could be worth considering as part of your investment strategy. Whether you’re interested in real estate, venture capital, or tangible assets like gold and cars, there are many ways to get started with alternative investments. So do your research, decide what type of investment is right for you, and then make a plan to get started today!