The 411 on alternative investments—what they are, how they work, and if they’re right for you
In 2021, data indicated that only 22% of investors had integrated alternative investments into their portfolios. But, at the same time, most ultra-high-net-worth individuals (81%) had invested in this asset class. Cue a fascinating unfolding paradox.
Investors continue to gradually recognize this less-traveled route as one that may lead to greater success in the long run. This sector may continue to flourish with alternative investment options such as cryptocurrencies, real estate, wine, precious metals, derivatives, venture and fine art gaining popularity.
Defining Alternative Investments
Most people are familiar with the tried-and-true strategies of stocks and bonds when it comes to investing. However, alternative investments have been gaining traction in recent years, and it's essential to understand what they are and how they differ from traditional investment options.
Alternative investments are assets that fall outside the realm of stocks, bonds, and cash—not typically something you hold in a 401(k). They are often less regulated and less liquid than traditional investments but can provide investors with unique benefits such as diversification and the potential for higher returns.
Historically, real estate and precious metals have been the kingpin of the alternative investments market, and that list continues to grow. Nowadays, investors have access to a laundry list of alternative assets such as crypto, NFTs, private equity, venture, commodities and collectibles, and fine art.
The Growth of Alternatives
Alternative investments have taken off like a rocket in recent years, more than doubling their assets under management (AUM) in the last decade and now totaling over $13T in value. This growth will likely continue as most estimates anticipate that number to top $26T by 2026.
Part of the reason for this explosion in alternative investments is our increased level of access to them. Real estate used to be for the wealthy, but now it’s being commoditized. Crypto was an obscure asset class that was hard to access, but now anyone can buy on an exchange. The list of examples goes on, there are even apps out there that allow you to invest in wine and fine art through a few clicks, something that’s particularly appealing to younger investors.
How to Integrate Alternatives Into Your Portfolio
It’s important to note that alternative investments shouldn’t replace traditional investing but rather supplement it. Alternative investments are typically more volatile, meaning that although they come with more upside, the downside is equally as steep.
It’s precisely that volatility that lends itself to creating high net worth and adding to those already wealthy. But it’s a double-edged sword, and it does not mean that alternatives can make anyone rich.
Integrating alts into your strategy
Don’t overdo it
When adding more risky assets to your portfolio, it’s essential not to outkick your coverage. If things go south, this could create a significant financial burden on your financial situation.
Taking a willy-nilly approach to diversifying your portfolio doesn’t accomplish much; you must approach it carefully. Adding some alternatives to your portfolio can be great, but make sure it’s not just anything. Alternatives aren’t passive, at least not at first. Take some time to research and find an investment that makes sense for your goals and financial situation.
Although they’ve been around for a long time, alternatives are still relatively new to the big stage, and there will be a lot of choppiness on the way up. Because of this, it’s best to avoid trying to time these nascent assets and hold them for the long run instead.
Understand liquidity risks
Alternative investments are often less liquid than traditional investments, meaning they may be more challenging to sell or convert into cash in the event of a crisis or sudden need. Be aware of any restrictions on liquidity before investing.
Consider tax implications
Most alternative investments may have unique tax implications, so it's crucial to understand how investing in these assets may affect your tax situation.
Be aware of high fees
Alternative investments often come with higher fees than traditional investments, so factoring these costs into your overall investment strategy is essential.
As with any investment, staying informed about market trends, economic factors, and any regulation changes that may impact alternative investments is essential.
Alternatives are easier to access than ever, and they could be a great addition to your portfolio if you do your due diligence first. You will likely come out on top with enough research and sharp-minded discretion.
What’s next? Download the Pocketnest app (if you haven’t already) pop into your to-do list to stay on top of your financial plan.