Alternative Investments: 9 Types to Consider
Looking for ways to invest outside of stocks and bonds?
Consider alternative investments.
In fact, over the last several decades, farmland averaged ~11% in total annual returns.
In the guide below, I’ll cover farmland real estate, the newest alternative available, and other common types of alternative investments. Keep reading to gain a better understanding of how these assets can help diversify your portfolio and offset the volatility we’ve seen with the stock market, helping you preserve your capital.
What Are Alternative Investments?
Alternative investments are assets that don’t fit conventional financial asset categories like cash, stocks, or bonds.
An example would be venture capital, where investments turn ideas into the businesses of tomorrow. Or diversifying investments with collectibles such as art and antiques.
Alternatives come with pros and cons, depending on your investment goals. To start, alternative investments are typically illiquid. This means that you cannot exchange them for cash quickly, making it an impractical option if you need money for an emergency.
For example, if you invest in traditional stocks, all you have to do is sell them, and after a day or two, the money will be in your bank account. But if you’re investing in an alternative asset like real estate, you’ll have to find a buyer and agree on a price. A process that usually takes several months at a minimum.
On the contrary, a potential benefit is that alternative investments don’t typically correlate with the stock market. This means that returns won’t necessarily move in the same direction as traditional assets do when the market fluctuates, an attractive way for investors to stabilize their portfolios.
9 Types of Alternative Investments
1 – Real Estate
Real estate investing is one of the most common forms of alternative investments, with housing acting as a tangible asset that everybody needs. Some people even consider it the best way to invest money.
Real estate can be broken into a few categories: commercial, residential, REITs, crowdfunding platforms, and even farmland, which we’ll break down below as a separate category.
The most popular way to start investing in real estate is to buy a house and rent it out. If done correctly, the rent, appreciation, and tax breaks can provide substantial returns.
More recently, crowdfunding platforms have risen in popularity, providing investors with an easy way to share in the rewards via a smaller allocation.
According to the National Council of Real Estate Investment Fiduciaries (NCREIF), commercial real estate has provided an average yearly return of 8.49 over the last couple decades.
However, investors should keep in mind that real estate investments strongly rely on physical location. For instance, real estate properties in the Northeast region of the U.S. have provided returns above 13%, whereas in the Southwest, returns have averaged around less than 7%.
2 – Farmland
Farmland, a subset of real estate, is the newest alternative investment on the block. Historically out of reach for most investors due to high price tags and required farming know-how, platforms such as FarmTogether are democratizing access.
But why farmland?
First off, farmland has had a strong performance over the last few decades. From 1992 to 2021, farmland averaged roughly 11% total yearly returns.
In addition, farmland has historically lower volatility than traditional investments. The total returns from 1992 to 2021 showed a standard deviation of only 6.75% for farmland, whereas U.S. stocks reported 16.89%.
Not to mention, the NCREIF Farmland Index’s Total Return has repeatedly reported returns more than twice the inflation rate since well before 1992. This means farmland has also been proven as a superior hedge against inflation.
3 – Private Equity
Private equity is a partnership investment fund that buys, consults for, and restructures private companies.
For example, imagine a private equity firm spots a company with growth potential. They’ll gather money from investors (you), buy most of the shares to gain control of the company, and optimize business practices to boost profit.
If everything goes well, the private equity firm will sell the company for more than they bought it for, giving investors a nice profit.
4 – Collectibles
Investing in collectibles involves buying everyday items that you think will increase in value over time (typically decades). This can include things like art, classic cars, wine, watches, or handbags.
These types of investments are generally a terrific way to diversify your investment portfolio. And, they have shown to bring in a 2-3% return post-inflation.
So let’s say you buy a few bottles of top-shelf wine and let it sit in your cellar for a few decades. As this wine ages, the quality improves, and so does its market value. For example, the Liv-ex Fine Wine 1000 (an index that tracks fine wines worldwide), found that fine wine has provided an average return of 10.6% over the last 15 years.
To get started with collectible investments, you must understand the industry you’re investing in. Without careful planning and analysis, these items can lose value quickly.
So I’d recommend investing in something you’re passionate about, as it’ll require plenty of research. If you love cars, consider investing in classic cars. Or, if you’re a big baseball fan, look into some baseball cards.
Also, keep in mind some things hold more value as a set. Instead of one valuable player’s card, imagine how much more it’s worth to have a whole world series winning team’s cards.
5 – Commodities
Commodities are often real assets or, more commonly, natural resources.
Popular examples include:
- Crude oil
Investors like commodities because they are physical goods that make up everyday essentials.
For example, we use crude oil to produce fuel. Grains feed livestock and populations. The intrinsic value creates an additional level of security compared to regular stocks.
In 2022, the performance of commodities demonstrated a whopping 26.5% year-to-date return.
However, it’s important to know that performance of commodities can depend on several factors aside from simply supply and demand. These factors include economical influences, production choices, and even weather patterns.
With commodities, you have two investment options. You could either invest in it directly or use commodity ETFs (Exchange-Traded Funds).
Commodities can be traded via market derivatives like futures or options.
If you choose the ETF route, use an online broker to buy commodities. This is a more practical option if you’re looking to capitalize on market fluctuations, as you can buy and sell ETFs within minutes.
6 – Hedge Funds
A hedge fund involves professional fund managers that invest clients’ wealth into privately pooled investment funds, often seeking high returns for risky strategies.
Hedge fund managers use various specialized skills to determine where to invest money. These investments are made in just about anything from startups to currencies to publicly traded securities.
They often will implement strategies such as market neutral, long-short equity, volatility arbitrage, and quantitative strategies to gain high returns.
Because of the increased risk, hedge funds are exclusive and typically only available to institutional investors. Institutional investors include those with endowments, pension funds, mutual funds, or of high net worth.
7 – Venture Capital
Venture capital is similar to private equity, where investors invest in private companies, try to grow them, and make a return.
The primary difference is that venture capital targets startups with growth potential.
It is common for investors to stay invested for long periods and release funding over time. In other words, they will release funding in rounds as certain milestones are met.
If you’re considering investing in a venture capital fund, you must have a significant amount of money since these funds have high minimum investments. They also come with a hefty risk as startups don’t typically have any revenue or profits reported yet.
8 – Private Debt
Private debt, also referred to as private credit, is a loan that investors can’t access on the public market. This also includes loans not financed by banks.
Similar to how some companies look to private equity as a means of funding, some look into private lenders.
Investors, who become lenders, make money from private debt when companies need extra capital to grow their businesses. Money is typically made from interest payments and repayment of the original loan amount.
9 – Structured Products
Structured products are alternative investment packages that include assets linked to interest plus underlying derivatives. These derivatives are typically tied to a market index or securities customized to the investor’s risk and return goals.
Common examples of structured products include credit default swaps (CDS), collateralized debt obligations (CDO), and mortgage-backed securities (MBS).
These types of alternative investments are complex and carry a high risk. For this reason, they are usually developed by investment banks and offered to groups of investors such as organizations or hedge funds.
Pros and Cons of Alternative Investments
|Potentially higher returns
|Can’t easily be converted to cash (illiquid)
|Ability to hedge against market downturns
|Typically require a lot of money to get started
|Provides tax benefits
|Alternative investments normally have higher fees
|Easy way to diversify your portfolio
|Valuing alternative tangible assets is challenging
|Connect with experienced portfolio managers and venture capitalists
|Many alternative investments are only available to accredited investors
Commonly Asked Questions About Alternative Investments
What Is A Newly Available Alternative investment?
Farmland is historically one of the most stable investments. Not sure how to get started? Check out FarmTogether. This farmland investment manager allows you to own shares of farmland, so you can get started investing today for a low minimum.
Are Alternative investments a Good Idea?
Alternative investments are typically complex and require a lot of research, so I wouldn’t recommend them to all investors. However, FarmTogether is a terrific option for those wanting to get started with alternative investments. FarmTogether makes it simple for accredited investors to add farmland real estate to their portfolio.
What Is an Example of an Alternative Investment?
Investing in farmland is an example of an alternative investment because it provides good returns and diversifies your portfolio. The best part is that you don’t have to make millions to get started. With a farmland investment manager like FarmTogether, you can start investing for as little as $15,000.
One alternative investment option we explored was real estate, more specifically, Farmland. To get started, I suggest checking out FarmTogether.
FarmTogether has three investment options:
- Crowdfunded farmland
- Sole ownership bespoke program
- Sustainable farmland fund
The crowdfunded offerings allow you to own fractional shares of farmland. An excellent option if you don’t have the funds to buy entire pieces of farmland real estate.
You can also invest in their bespoke offerings if you’re interested in owning the entire farm and not sharing in the stake with other investors.. Last but certainly not least, if you want diversification via a single allocation, their Sustainable Farmland Fund provides you with access to permanent crops & row crop properties across the US in a diversified, evergreen fund structure.
Farmland real estate investments have provided steady and stable returns for decades.
If you want to learn more about FarmTogether, read the full review here.