Investors looking for a little something different to help spread their risk around should take a little time to learn about alternative investments.
You’ve probably read at some point that you should “diversify your portfolio”—the investing equivalent of not holding all your eggs in one basket. But when you hear that, you think, “Well, I should own different types of stocks,” or, “I own many types of stocks, but I should own some bonds, too.”
That’s true: Stocks and bonds are two very important asset classes that you should consider when you learn how to start investing money. But that’s not all you can do to diversify.
You can (and should) consider other asset classes, too.
A truly diversified investment portfolio should also include alternative investments. By definition, these represent financial assets which do not fall into the conventional asset classes: stocks and bonds.
Alternative investments are an extremely broad category that includes both intangible assets (think hedge funds, private equity, and venture capital), as well as a wide array of tangible assets—anything from gold and oil to art, wine, and even basketball shoes.
The best alternative investments provide much-needed diversification in your portfolio, and because they often don’t behave like stocks and bonds, they can provide protection against volatility in the stock and bond markets.
Because alternative assets are such a wide world, we’re going to talk to you about some of the most popular forms. Consider this an Alternative Investments 101 guide: We’ll talk about several alternative investments you can consider, show you a few platforms you can find them on, then examine the pros and cons of owning “alts.”
Alternative Asset Platforms—Our Top Picks
Minimum investment: $50,000; Fees vary by offering.
Minimum investment: $5,000. Annual fees vary by offering, but range between 0.5% and 1.5%.
Minimum investment: $1,000. Fees: 2.85% annually for balances of $50,000 or less. 2.5% annually for balances over $50,000.
Best Alternative Investment Options
A quick note before we dig in. When it comes to choosing which alternative investment options make sense for your portfolio, consider the following:
- Their liquidity (i.e., how quickly and cheaply these assets can convert to cash if you need to sell)
- How they fit into your budget
- Your investing time horizon
- Your patience level
- What you enjoy
We get it. That last point might seem a little touchy-feely. But the great thing about alternative assets is that several of them allow you to invest in things you might already collect or learn about as one of your hobbies.
1. Crowdsourced Commercial Real Estate
“Buy land, they’re not making it anymore.” – Mark Twain
Commercial real estate (CRE)—basically any land or property that’s used for business rather than living—can line your pockets in two ways:
- Rent can provide you with steady, passive income.
- Property values typically appreciate over time.
Of course, you’ll need to get financing—which means you’ll need to convince your lender that you know what you’re doing when it comes to, say, assessing net operating income potential, screening tenants, maintaining properties, and handling all of the finer legal details of buying and selling real estate. And once you get financing, you’ll either have to buy or build the commercial real estate property, after which you’ll need to go about screening and eventually leasing out space. Once you figure out all of the expenses you’ll carry, whatever’s left over is your profit.
Nevermind that you’ll have to factor in all of your time spent, the stress from handling commercial real estate negotiations, meeting tenant obligations, and practically living on call to handle any emergencies that might transpire.
Or … you could just outsource all of the hard work to real estate crowdfunding platforms.
Crowdfunding platforms do virtually all of the work. You simply select investing opportunities and provide the capital, then collect returns—either in the form of regular income, profits from the sale of real estate, or both.
Real estate crowdfunding platform pick 1: Fundrise
Fundrise is a popular real estate crowdfunding platform that allows you to diversify through its numerous funds. Each fund holds a number of properties and is designed to provide varying levels of risk and income.
Among its options:
- Starter and Basic accounts: Investors can now access Fundrise for as little as $10. People who open a Starter account ($10-plus minimum investment) or Basic account ($1,000-plus) have their money automatically invested in the Flagship Real Estate Fund, which seeks a balanced objective of income and growth.
- Core, Advanced, and Premium accounts: Core ($5,000-plus), Advanced ($10,000-plus), and Premium ($100,000-plus) accounts all have access to more specialized strategies. The four primary funds, from low risk/income to high risk/income, are Fixed Income, Core Plus, Value Add and Opportunistic. These accounts also have varying amounts of access to Fundrise’s “eREITs.” Also, Advanced and Premium accounts may invest in the Fundrise eFund, which is a tax-efficient partnership that can also hold non-REIT-eligible assets with “unique potential.”
- Fundrise iPO: This “internet public offering” allows investors to buy a stake in Fundrise’s parent company, Rise Companies Corp.
- Innovation Fund: This fund does not invest in properties, but rather private high-growth technology companies. While the fund expects to focus primarily on late-stage companies, it can hold early- and late-stage private companies, as well as some public equities. (Fundrise would likely invest in these publicly traded companies prior to their IPO, or initial public offering.)
You do not need to be an accredited investor to invest in Fundrise, but several of its funds are closed to non-accredited investors.
Fundrise does share one thing in common with traditional commercial real estate investing, however: It can be highly illiquid. Fundrise itself states that “the shares you own are intended to be held long-term.” You can incur a penalty for selling any eREIT and eFund shares held for less than five years, for instance. Also, you can’t pick and choose what you sell—Fundrise’s “first in first out” system means that when you liquidate, the first shares sold will be those you’ve held the longest.
Even then, commercial real estate remains one of the best alternative investments you can own, and Fundrise helps people easily reap its rewards. Like with owning shares of publicly held real estate, private CRE price returns will often lag a major index like the S&P 500. But the passive income from real estate investing is nice: Since 2017, Fundrise’s average annual income return of 5.29% dwarfs that of both public real estate investment trusts (REITs, 4.1%) and the S&P 500 (2.0%). That includes a 1.5% total return (price plus dividends) in 2022 compared to double-digit losses for public REITs and the S&P 500.
Most of Fundrise’s real estate funds charge an annual 0.85% flat management fee. The Fundrise Innovation Fund, which provides access to venture capital-style investments, charges 1.85% annually.
Visit Fundrise to learn more about this alternative asset class or sign up today.
- Regardless of your net worth, you can now benefit from real estate’s unique potential for generating consistent cash flow and long-term gains with Fundrise starting as low as $10.
- Consider diversifying your portfolio with real estate.
- Special Offer: Sign up for an account and make your first investment to receive $10 worth of free shares.
- Low minimum investment ($10)
- Accredited and non-accredited investors welcome
- IRA accounts available
- Highly illiquid investment
Related: 10 Best Fundrise Alternatives [Accredited & Non-Accredited Apps]
Real estate crowdfunding platform pick 2: First National Realty Partners
First National Realty Partners (FNRP) is one of the fastest-growing vertically integrated CRE investment firms in the United States. It’s also focused on a very particular niche: grocery-anchored commercial real estate.
FNRP’s team leverages relationships with top-tier national-brand tenants—including Kroger, Walmart, and Whole Foods—to provide investors with access to institutional-quality CRE deals both on- and off-market. Unlike many of the other sites on this list, which are equity crowdfunding platforms, FNRP offers private placements that only an accredited investor can access.
They’ve helped thousands of investors increase their net worth and diversify their portfolios against market volatility through deals that yield steady cash flow.
FNRP also progresses from an entire investment lifecycle, from acquisition through disposition, 100% in-house. A large team of professionals filters through thousands of deals to choose a handful they believe will outperform their peers.
Unlike a traditional real estate investment trust (REIT) or fund, you have the ability to pick the deals that best align with your investment needs, so you can use FNRP’s various offerings to build your own portfolio.
This relative exclusivity does, however, come with a high minimum investment of $50,000. Sign up to learn more about the opportunity and determine whether it makes sense for your investment goals.
Read more in our First National Realty Partners review.
- FNRP is the leading sponsor for grocery-anchored commercial real estate.
- FNRP has a nationwide focus and leverages relationships with the best national-brand tenants to bring accredited investors exclusive access to institutional-quality deals.
- FNRP provides partners with institutional-quality investments that achieve exceptional, risk-adjusted returns (12%-18% targeted average annual returns, of which, 8% is the targeted average annual cash distribution.)
- Uses the Dragnet Acquisitions Model - strong due diligence. FNRP looks at 1,000 deals and chooses just one. FNRP chooses only the best deals they believe offer the highest return for the absolute lowest risk.
- FNRP's entire investment cycle is 100% in-house and not outsourced like traditional private equity sponsors.
- Strong performance track record
- Unique investment niche (grocery-anchored CRE)
- High total shareholder return
- Only accessible to accredited investors
- High investment minimum ($50,000)
Related: 11 Best Stock Portfolio Tracking Apps [Stock Portfolio Trackers]
2. Real Estate Investment Trusts (REITs)
A real estate investment trust (REIT) is a special classification of company that Congress created in 1960 to make it easier for people (especially small-money investors) to invest in real estate. Instead of having to pony up the large amount of money it would take to buy a property, investors can buy shares in a REIT that holds real estate.
Real estate investment trusts have a specific legal structure that requires them to pass along at least 90% of their taxable income to shareholders. As a result, the bulk of that rental income earned from properties is returned to you and I as passive income in the form of above-average dividends.
While REITs are a great source of income, you do take a couple risks. For one, REIT values can go up and down, so you can lose a lot of money if you choose the wrong investments and don’t practice proper risk management. And more importantly: REIT dividends are not guaranteed. If a REIT doesn’t generate enough income to cover all of its costs, it might have to cut or even suspend its dividends. So invest with care.
Publicly traded REITs
Investors can purchase publicly traded REITs via a brokerage account, IRA, or any other trading account, just like they would any other plain ol’ stock. The real estate investments typically are used to generate passive income given that they typically sport higher dividend yields than most other sectors.
And like with other types of stock, if you’re not sure about which REIT to buy, you can always hold several in a mutual fund or exchange-traded fund (ETF). An indexed mutual fund or ETF, for instance, can put your money to work in dozens of REITs for a small annual fee.
The advantage of owning publicly traded REITs is high liquidity. If you need to raise cash, you can just sell your shares when you want.
Want to own REITs? You can do so through virtually any broker. You can read more about our favorite investment apps, but we suggest Plynk, Firstrade, and Webull, among others.
That said, not all REITs are traded on the public markets. As the name would imply, private real estate investment trusts are more difficult to invest in, given that they’re usually limited to a certain class of investor. However, even then, platforms exist that allow you to tap private REITs.
Private REIT platform pick: Streitwise
Streitwise provides investors of all stripes with access to a private equity REIT that invests in numerous real estate assets.
The Streitwise REIT invests in stable, institutional-quality commercial real estate that’s intended to produce steady cash flow. It currently boasts an average annualized distribution of 8.96% over the past 23 quarters, and 2022’s distributions came to 7.8%. From a pure yield perspective, that dwarfs major benchmarks for publicly traded bonds and publicly traded REITs.
And from a total-return perspective, the REIT’s 10.59% three-year average—covering a particularly tumultuous period for investments—has been one of the best alternative investments, topping stocks, bonds, and publicly traded REITs.
Streitwise also has a “DRIP” (dividend reinvestment plan), which automatically reinvests dividends back into the REIT, for investors looking to grow their wealth through compounding.
Also worth noting is that Streitwise has $5 million of its own money invested in the REIT. This kind of investment is often referred to as “skin in the game,” and is meant to prove that management’s interests are the same as yours—enriching shareholders.
The current minimum investment for the Streitwise REIT stands at 500 shares, which currently would cost you $4,615. (That dollar amount could change depending on when you sign up.) If you want to buy more shares of the Streitwise REIT, you can do so in $500 increments.
Streitwise charges a 2% annual fee, which is taken directly out of the dividend payment. The fee level is high compared to, say, a publicly traded REIT index fund, and even higher than some actively managed REIT funds. But for what you’re getting—access to private real estate you couldn’t invest in elsewhere—it’s a reasonable cost.
The drawback here? Liquidity. You have to wait at least one year before you can redeem your shares. Even then, if you sell before you’ve owned the shares for at least five years, you’ll face a penalty.
But if you want to generate steady passive income over the long run, using money you won’t need for several years, consider diversifying into private real estate through Streitwise.
- Begin earning passive income in private real estate for ~$5,000.
- Streitwise REIT provides investors with access to stable, institutional-quality commercial properties.
- As of 4Q2022, Streitwise paid a quarterly dividend at an annualized rate of 8.96% since 2017, net of fees. This roughly doubles the average paid by public REIT alternatives.
- Strong performance track record vs. industry peers
- Lower fees than other funds (2%/yr., w/o syndicator fees)
- DRIP program
- High investment minimum (~$5,000)
- Penalty for redeeming shares within five years
Related: 14 Best Stock Picking Services, Subscriptions, Advisors & Sites
3. Invest in “Blue-Chip” Art
A term you’ll often hear in investing is “blue chip.” When it comes to publicly traded stocks, this tends to mean “large, well-established companies.”
The meaning is similar for art. “Blue-chip art” (or commonly “fine art”) typically boasts high aesthetic quality and was produced by well-established artists. And long-term, fine art has shown to be a reliable and lucrative investment.
Of course … how many of us could afford $150 million to take a Gustav Klimt off Oprah’s hands?
Blue-chip art platform pick: Masterworks
Well, times change. No, most anyone reading this doesn’t suddenly have a $150 million check floating around their pockets. But if you have a smartphone in that pocket, and at least $500 to invest, you can put that money to work in fine art via Masterworks.
Masterworks has made blue-chip art investments more accessible than ever, allowing non-accredited investors with much more reasonable sums at their disposal to purchase fractional interests in expensive pieces of art. That means if your application is approved, you can buy partial shares of ownership of artwork created by the likes of Andy Warhol, Claude Monet, Banksy, and more.
The Masterworks team has over 75 years of collective experience as dealers, collectors, or working for auction houses. They look at a database of more than a million auction records and choose artists based on risk profiles and appreciation. They then find artwork they believe is of high quality and strong value, purchase it, then file an offering with the SEC to allow its members to invest in the work. Masterworks will hold each piece of artwork for between three and 10 years.
During that time, investors can purchase shares in the artwork (typically at $20 per share). If they want to exit, they can do so in one of two ways:
- If the investor wants to exit early, they can try to sell their shares on Masterworks’ trading market.
- If they hold their shares until Masterworks sells the painting, they’ll receive a pro rata share of the proceeds.
Just note that Masterworks collects a 1.5% annual fee per year, and takes 20% of all future profits on the sale of artwork.
Investing in fine art is not for the impatient; it can take years for the asset to appreciate and sell for a gain. However, Masterworks does provide some form of liquidity through its secondary marketplace.
One confusing point for most people considering Masterworks is the required minimum investment for each offering, with several media outlets reporting wildly different numbers. So, here’s exactly how it works, directly from Masterworks’ press team:
“The minimum per the Offering Circular filed with the SEC is $15,000. Masterworks has the sole discretion to lower that on a case-by-case basis depending on investor suitability. $500 is the lowest it can be waived to, and is typically afforded to investors with less than $100,000 liquid portfolio.”
More succinctly: The listed investment minimum for each offering is $15,000, but you can lobby to have that lowered to as little as $500. (Shares, by the way, are typically priced at $20 each.)
Want to learn more or sign up? Visit Masterworks today.
- Masterworks allows investors to buy shares in art selected by the platform's team for both high quality and strong value.
- The service offers a secondary market where investors can sell shares if they want to exit their investment early.
- Provides an easy way to invest in art
- Access to dedicated support representative
- Investing requires a call screen consultation
- High fees
- High minimum investment per offering ($15,000), though it can be waived to as low as $500 on a case-by-case basis
Related: Best Investments for Roth IRAs [Target High-Growth]
4. Invest in Small Businesses
Imagine, if you will, a small town in the heart of America. Main Street is lined with quaint shops, and diners. There’s a small park. A local library.
As you walk down this thoroughfare, you can feel the sense of community. Some people stop by the local businesses to shop; others just to chat with the owner. It feels like everyone is family here—and in a way, they are.
Small businesses are the lifeblood of this town. Every niche business here brings both joy and financial stability to someone, and usually several someones.
Wouldn’t you want to support this kind of community and see it flourish?
Small business platform pick: Mainvest
Small businesses are a difficult (and sometimes impossible) alternative asset class to get involved with because they are almost always privately owned. However, Mainvest provides accredited and non-accredited investors alike an opportunity to help fund these small companies.
Mainvest curates vetted small business opportunities in your local community or nationwide for you to invest in. Unlike other crowdfunding sites, where the investments are loans that pay interest, Mainvest’s investments are revenue-sharing notes. These financial agreements require the company to share their revenue with investors until they’ve reached a target investment multiple. Target returns range from 10% to 25%.
Mainvest has a strict vetting process that results in them allowing just a small percentage of businesses who sign up for the platform to raise capital. You can invest based on location, industry, and risk appetite by comparing terms and qualitative data for the hundreds of investment opportunities that have launched on the small business investing platform since its founding. Examples of investment companies available as of this review? An indoor golf club in Raleigh, North Carolina; a cafe in Mesa, Arizona; and a Filipino kitchen and market in Philadelphia.
Liquidity is an issue here. You generally can’t resell your shares, so once you make an investment, you’re generally locked in for several years.
However, minimum investments are low, typically starting at just $100, so you don’t need to invest much capital, and you can diversify by spreading money across numerous offerings. Better still: Mainvest extracts no fees from investors.
- Mainvest is a small business investment platform allowing you to target returns of 10%-25% with as little as $100 to start.
- These passive income investments in vetted small businesses can provide your portfolio with exposure to an emerging asset class while supporting local communities.
- Invest in innovative, community-driven founders' businesses in your backyard and across the country.
- Invest in small businesses for as little as $100
- Invest in local businesses to have impact
- High target returns (10-25%)
- No fees
- Can't invest in digital-only businesses
- Illiquid (can't buy/sell in secondary market)
- Maximum investment size depends on your income or net worth
Related: How to Invest Money: 5 Steps to Start Investing w/Little Money
5. Invest in Fine Wine
You don’t need to be a wine connoisseur to understand why fine wine can be a worthwhile investment.
Wine can increase in quality as it ages, for one. And with rare wines, supply and demand work in your favor: Only a finite amount of wine is produced in specific regions each year, and as people drink that wine, the supply diminishes. As demand increases for the dwindling supply, the price people are willing to pay for it rises.
Fine wines can deliver long-term, stable growth. It also has a low correlation to the economy, so it can act as a hedge against inflation and economic recessions.
Unfortunately, you can’t simply buy a bargain wine from the grocery store, stick it in your basement for a few years, and expect to reap an eventual profit. If you want to make money from wine, it needs to be of high quality, ideally rare, and stored in optimal conditions.
Wine platform pick: Vinovest
Unless you already have vast wine knowledge and a professional storage setup, we recommend using Vinovest. Vinovest ensures wine authenticity, stores it for you, and ships it to buyers when you’re ready to sell. Users of the platform can fund an account with a mere minimum of $1,000, select an investment style, and wait patiently as their account balances (hopefully) grow. If you decide you’d actually like to taste some of that rare wine yourself, Vinovest will ship it to you for free.
And if you prefer a spirit with a little more bite, Vinovest now allows users to invest in whiskey. You can buy entire casks of American Whiskey from the likes of Whistle Pig and Breckenridge, or Scotch from Macallan, Highland Park, and more. You’ll receive a sample bottle from your cask every year, and if you decide it’s too good to sell, they’ll bottle the rest for you.
Vinovest charges an annual fee of 2.85%, and that annual fee drops to 2.5% for balances over $50,000. You can learn more or sign up at Vinovest, or dive deeper into this platform by reading our Vinovest review.
- Vinovest allows you to invest in fine wine and whiskey—investments that aren't correlated with the stock or bond markets.
- Initial questionnaire helps Vinovest build a wine portfolio based on your investment goals
- Talk with a portfolio advisor to learn more about wine investing or improve your portfolio
- Low $1,000 minimum balance required to start
Related: 19 Best High-Yield Investments [Safe Options Right Now]
6. Peer-to-Peer Lending
Peer-to-peer (P2P) lending allows borrowers to seek out financing not from financial institutions like banks, but from individual investors (or groups of individual investors). So, the “investor” in a P2P lending situation is actually a lender—providing capital now in exchange for the return of that capital later, as well as interest paid in between.
Of course, it’s difficult to find P2P lending opportunities on your own. You’re unlikely to find anyone who needs a loan by knocking door to door. (And let’s be honest: Even if you did, do you think they’d take a loan from someone who just knocked on their door?)
That’s where peer-to-peer lending apps like Kiva and Prosper come in. These platforms connect would-be borrowers to investors like you. Loans will vary by type of applicant, risk level, and interest rate. In many cases, the loans might be small sums—a few thousand dollars—and you can invest in a portion (or sometimes all) of that loan.
The risk, of course, is that the lender defaults on their loan, leaving you with a partial or complete loss on the investment. Liquidity isn’t great, either, with most investments lasting for several years.
7. Equity Crowdfunding
Typically, if you want to own stock in a company, you have to invest through the public markets. But equity crowdfunding makes it possible for everyday investors to secure a stake in privately held businesses.
Equity crowdfunding platforms typically allow for small investments (read just hundreds or even tens of dollars) in a wide range of businesses—from wind-energy firms to fashion apps to CBD brands. The platform is usually paid through either a monthly fee or by collecting a percentage of the funds raised for the business.
The potential upside for equity crowdfunding is enormous—oftentimes, investors are getting in on the ground floor of what could be a potentially high-growth company. But the risks are much higher, too. Publicly traded companies are required to regularly give detailed reports of their financial situations—information that’s vital for valuing investments and determining risk/reward. Privately held companies can be much more obtuse, making it far more difficult to figure out exactly what you’re buying.
Equity crowdfunding pick: EquityMultiple
Some real estate crowdfunding platforms only allow you to invest in property portfolios. However, some platforms, such as EquityMultiple, also allow you to invest in individual properties—in this case, commercial real estate (CRE).
EquityMultiple carries a minimum $5,000 initial investment and is limited to accredited investors. However, those investors have access to individual commercial real estate deals, funds, and even diversified short-term notes.
For those interested in learning more about EquityMultiple, consider signing up for an account and going through their qualification process.
- EquityMultiple is a real estate investing platform for accredited investors.
- Focused on commercial real estate, EquityMultiple has a team with more than $75 billion of transaction experience vetting suitable investment properties.
- The company's due diligence process targets profits the company believes will provide stable, protected investments for investors.
- The company has managed net aggregate returns to investors of 17% to date and total distributions paid to investors of $298 million.
- Makes commercial real estate Investments accessible
- Intuitive website design
- High net total returns and distributions paid to investors
- Only available to accredited investors
- High investment minimum to begin
- Fee structure varies by investment, complex at times
Related: 20 Best Investing Research & Stock Analysis Websites
Commodities are various types of physical economic goods, ranging from energy resources such as oil and natural gas to metals such as gold and copper to even farm goods such as corn and wheat.
From a practical perspective, you can’t (or at least shouldn’t) invest in most physical commodities directly (e.g., buying a barrel of oil or a bushel of wheat). You technically can buy a few precious metals fairly easily—gold and silver bars and coins are popular fare, for instance. But the problem with buying or selling physical gold or silver is that you have to find somewhere safe to store it, pay for insurance, and once you’re ready to sell it, find someone to sell it to.
For many, that’s a lot more trouble than it’s worth. So many investors get their commodity exposure through ETFs. For example, the iShares Gold Trust Micro (IAUM) represents physical gold stored in vaults and charges just 0.09% annually (or $9 per year for every $10,000 invested) for the trouble. The upside: You can buy these kinds of ETFs in virtually any investment account. The downside? You can’t redeem the shares for physical gold, so if you’re planning for an apocalypse, ETFs won’t do you much good.
Capital gains for commodities and commodity ETFs are typically taxed on a 60%/40% system—60% at long-term capital gains tax rates, and 40% at short-term rates (your federal income tax rate). But you could face different taxation if, for instance, you hold a commodity exchange-traded note (trades like an ETF, but is structured much differently) or an ETF backed by commodity futures.
When in doubt, ask a tax professional.
Related: 9 Best Fractional Share Brokerages to Buy Partial Stocks & ETFs
9. Hedge Funds
Hedge funds typically pool money from a group of investors, then invest those funds into stocks, bonds, and alternative investments to generate returns. Their goals might vary—many hedge funds simply seek out high total returns, but others look to provide steady returns through all types of market environments, even at the cost of subpar performance during high-growth bull markets. Liquidity tends to be fairly high, with investors able to pull funds within a day or less.
However, virtually all hedge funds are limited to accredited investors (usually wealthy individuals), as well as institutional investors (pension funds, endowment funds, etc.). So this isn’t a viable option for most everyday investors.
10. Private Equity
Private equity (PE) is similar to hedge funds in that they’re typically the domain of well-heeled individuals and institutional investors. But there are some key differences.
Primarily, PE is interested in much longer-term goals. Rather than buying equity, debt, or other investment positions that can be exited quickly, private equity tends to buy controlling stakes in their target companies. The goal? Force improvement of the company—PE firms are renowned for “streamlining” (reducing costs, including layoffs), though they sometimes will fund expansion and will even change or broaden the company’s business lines—so they can eventually sell their stake for a much higher price.
Thus, private equity funds tend to be much less liquid than hedge funds, with investments typically lasting for years. And again, unless you’ve got hundreds of thousands if not millions of dollars to throw around, you likely can’t participate in the private equity game.
11. Mineral Rights and Royalties
In the United States, land often comes paired with the right to any minerals produced on the property or beneath it. People commonly refer to these natural resource claims as “mineral rights.”
Should an exploration and production company ever wish to drill in your area, and it results in production of oil, gas, or other commodities, you have a right to some of the income generated from those operations.
In my first job, I worked to secure mineral rights from landowners who lived above oil and gas fields across the country. The company identified hot spots across the country and approached landowners who wished to sell their future stream of income payments for a discounted lump sum. My firm had patient capital from investors who wished to park their money in these properties for the long-term.
Initially, my focus centered on income-producing assets, or properties already generating income from oil and gas wells. However, with time, my firm decided to begin diversifying into proven but non-producing properties to provide potential upside to the portfolio in the long-term.
And upside did it provide! The firm’s portfolio quadrupled in value in only 18 months by adding these properties—properties that did not produce any resources at the time of purchase.
Was there risk? Absolutely. There was no guarantee that oil and gas would come out at economically feasible levels—or at all (in the case of wildcatting wells).
However, while many of these companies exist, the opportunities are few. You might only discover these firms through networking; from there, you’ll have to determine whether you can buy into the firm directly (or invest in a pool of capital if you trust the company to operate prudently). If that’s the case, research the companies’ leadership philosophies, their investment objectives, and how their performance has fared in the past before proceeding with investing.
Pros of Alternative Investments
As we mentioned above, alternative investments offer plenty of positives for those considering adding them to their portfolios.
Below, we’ll outline the primary advantages to holding an alternative investment. But we’ll remind you: Not every “alt” is the same. Some alternative investments provide more of these benefits than others.
Diversification means holding many different types of investments. And there are many different types of diversification. For instance, you can …
- Hold stocks from different sectors, like technology, healthcare, and financials
- Hold stocks from different areas of the world, like the U.S., Europe, and Asia
- Hold not just stocks, but bonds too
- Hold many different types of asset classes—stocks, bonds, and alternative assets
Diversification reduces the possibility that one single investment will determine the fate of your entire portfolio. If all of your money is invested in one stock, and that stock collapses, much of your wealth will be destroyed. But if your money is invested evenly across a hundred different stocks, bonds, and alternative assets, most of your wealth will remain intact even if one of those investments goes to zero.
→ Higher Potential Returns
Many alternative investments require you to lock up your money for a long time. But investors expect a premium in exchange for losing immediate access to their funds.
For disciplined, long-term oriented investors, some alternative investments’ allure is higher potential returns that they simply might not be able to get from other investing strategies.
→ Not Correlated with the Stock or Bond Markets
Many of the alternative investments above do not have significant (if any) correlation with the stock or bond markets. Or, in other words, factors that affect the stock market don’t necessarily affect these “alts,” and thus when stocks go down, it’s possible that your alts will remain steady or even appreciate in value.
That’s what we mean by the power of diversification. Some alternative asset classes can insulate your portfolio from the day-to-day volatility of the stock (and even bond) markets.
→ Tax Benefits
Alternatives, like other types of investments, have specific tax benefits. Some alternatives offer pass-through deprecation, for instance, and some get long-term capital gains treatment. The type of tax advantage might dictate what kind of account you hold the investment in—a standard brokerage account or a tax-advantaged account. (Though many alternatives can’t be held in either type of account.)
If you have uncertainty about the tax consequences of an alternative investment, please consult a tax professional for advice related to your specific situation.
Cons of Alternative Investments
No investment is all rainbows and puppies. Every investment comes with risk—and it’s important to understand those risks before diving in. So let’s take a moment to address some drawbacks of alts. Like with benefits, some alternatives might feature more of the following shortcomings than others.
→ Risk of Loss
Every investment carries some risk of loss. Alternative investments are no different.
Like with traditional assets (stocks and bonds), alternative assets’ risk profiles run the gamut, from conservative to aggressive. However, it’s not just the risk of the investment you have to contend with—it’s also the regulations (or lack thereof). Traditional investments are governed by extremely strict rules and regulations enforced by the likes of the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).
However, many alternative investments aren’t regulated by any authority, meaning there are fewer investor protections. So take the time to learn about the underlying rules and regulations of any alt you choose to invest in.
→ Unfamiliar Assets and Risks
A major reason why alternative investments can carry more risk than more traditional investments stems from simple lack of familiarity.
Stocks, for instance, are an extremely popular asset class that most investment accounts support. Because so many people participate in stock investing, publishers are happy to churn out books, magazines, e-letters, and articles about the stock market, meaning there’s a wealth of available information about the asset class.
The same can’t be said for more niche alternative investments.
As a general rule, you should avoid investing in anything you do not fully comprehend. You should always conduct your own research not just into an alternative investment, but that investment’s asset class as a whole, before moving forward with any purchase.
→ Tax Disadvantages / Complexity
While some alternative investments offer tax benefits, others have no tax benefits and/or add complexity come tax time. Some alternatives, for instance, are taxed like regular income at the highest marginal tax rate.
Again, consider speaking with a tax professional if you do not have a firm grasp on the tax consequences of an alternative investment you’re interested in.
→ Some Require a High Minimum Investment
Some investments require you to invest a certain minimum amount of money to start, or a minimum investment. Mutual funds are well-known for investment minimums—some mutual funds have none, some have minimums as low as $500, and some have minimums as high as $1 million.
The same goes with alternative investments—though there are two types of minimum to look out for:
- Minimum investment: Exactly like with mutual funds, sometimes you’ll need to pony up a certain amount of money to buy into an alternative investment. On some platforms, it can be low—say $5 or $20. On the other end of the spectrum, you might need more than a million dollars to invest in a hedge fund or private equity.
- Minimum account balance: Some platforms require you to have a much higher minimum account balance than what it takes to participate in the investments you access from that platform. For example, a platform might allow you to participate in deals for as little as $50 each, but require you have a minimum account balance of $5,000.
→ Some Are for Accredited Investors Only
In broad strokes, two types of investors exist in the eyes of U.S. regulators: accredited investors and non-accredited investors.
Accredited investors are a special class of investor that must meet either financial criteria or professional criteria. Here, we’ll focus on the financial criteria. From the IRS, you can qualify if you can claim one of the two following items:
- “Net worth over $1 million, excluding primary residence (individually or with spouse or partner)”
- “Income over $200,000 (individually) or $300,000 (with spouse or partner) in each of the prior two years, and reasonably expects the same for the current year”
Why do we mention this? Well, some alternative investments only allow access to accredited investors. A few of the platforms above offer access to both these high-net-worth individuals and everyday investors alike, but provide more investing options to the former.
As we mentioned above, you don’t need to have much money to access some alts, but having more money certainly opens more doors.
Remember: Liquidity means the ability to convert an investment into cash. A stock, for instance, can be sold in a moment and turned into cash; thus, stocks are highly liquid. Most alternative investments, however, are not so liquid, requiring you to lock up your investment money for months if not years.
So whenever you invest in alts, you need to think about the time frame you’re attaching to that money. For instance: Let’s say you have $1,000, but you know you’ll need that $1,000 in a month. You definitely shouldn’t put that $1,000 to work in a real estate fund that won’t let you sell your shares for at least five years.
How Much Should You Invest in Alternatives?
At this point, you might have found an alt you’re interested in, so now you’re wondering, “How much should I invest in alternatives?”
As with virtually any investing-related question, the answer is, “It depends.”
Alternative investments can be used for any purpose—generating high price returns, delivering stable income, even protecting you against a market crash. But rarely do experts suggest making alternatives a large part of your portfolio.
The general wisdom: Allocate about 10% of your portfolio to alts. The stock and bond markets are much more liquid, better understood, and have proven track records of generating reasonable long-term rewards. Alternatives, while useful, are generally regarded as too risky and illiquid to warrant a larger portion of your nest egg.