In the past, the traditional trio of stocks, bonds, and cash has long been the go-to strategy for many. However, as the financial landscape evolves, so too should our investment strategies. For those seeking to diversify their portfolios and potentially unlock new avenues for growth, non-traditional assets offer an intriguing proposition. From real estate and precious metals to cryptocurrencies and private equity, these alternative investments can provide a hedge against market volatility, offer unique growth opportunities, and ultimately, enhance your financial resilience.
What’s a Non-Traditional Asset?
Non-traditional or alternative investments are those that do not fall into the conventional categories of stocks, bonds, and cash. They encompass a wide range of asset classes, including private equity, venture capital, hedge funds, managed futures and commodities, art and collectibles, derivatives, and real estate. The key advantage of these investments is their relatively low correlation to traditional asset classes, making them an effective tool for portfolio diversification.
However, it’s important to note that investing in non-traditional assets can come with limited liquidity. This means they cannot be converted to cash as quickly as traditional investments. Therefore, understanding how these investments work and how they might fit with other holdings in your portfolio is crucial.
Real Estate: A Tangible Asset with Potential
Real estate is perhaps the most well-known alternative investment. It can provide ongoing cash flow and the potential for appreciation. Moreover, real estate generally has a low correlation to traditional investments such as stocks and bonds, making it a valuable addition to your portfolio.
Investing in real estate can be done in several formats, including direct property investment, real estate investment trusts (REITs), and real estate crowdfunding platforms. Each of these options offers unique benefits and risks, so it’s important to carefully consider your investment goals and risk tolerance before diving in.
Art and Collectibles: Investing in Beauty and Rarity
Fine art and collectibles is a broad category in which assets can be hard to value. Items here can range from a piece of artwork, such as a painting or sculpture, to a valuable sports card or other memorabilia. These items are valued based on market demand and what someone will pay for them.
Traditionally, fine art and collectibles have been reserved for wealthy investors, but platforms such as Masterworks provide access to art for smaller investors as well. These platforms allow investors to buy shares in high-value art and collectibles, making this type of investment more affordable and providing a level of liquidity generally not available when investing in fine art and collectibles.
Precious Metals: A Traditional Store of Value
The category of precious metals includes gold, silver, platinum, and others. Precious metals have a low correlation to more traditional investments and have been traditional stores of value. They can be purchased as coins or bullion, usually in the form of bars. In addition to direct investment, there are ETFs that track these metals, offering another way to invest in this asset class.
Investing in precious metals can be a good hedge against inflation and currency fluctuations. However, like all investments, they come with their own set of risks, including price volatility and storage issues.
Commodities: A Bet on Future Prices
Commodities include various types of agricultural crops, such as wheat and corn; livestock; energy, such as oil and gas; precious metals; and others. Commodities are often traded as futures contracts, which are essentially a bet on the future direction of the underlying commodity. Commodity ETFs and mutual funds are a way for investors to participate in commodity investing without buying and selling futures.
Investing in commodities can provide a hedge against inflation and diversification. However, the prices of commodities can be highly volatile, influenced by factors such as weather, geopolitical issues, and economic indicators.
Cryptocurrencies: The Digital Frontier
There are a variety of cryptocurrencies available to investors, with Bitcoin being perhaps the most well known. Cryptocurrencies are based on a blockchain platform and take the form of digital tokens. They were originally devised to be a store of value, much like precious metals such as gold and silver. However, they have been very volatile, with some extreme price movements in some cases.
Investing in cryptocurrencies can offer high returns, but they also carry considerable risk. Therefore, they should be approached with caution and constitute only a small portion of a diversified portfolio.
Crowdfunding: Investing in Innovation
Crowdfunding is an increasingly popular way for entrepreneurs and start-up businesses to raise much-needed capital for their businesses. A crowdfunding platform is essentially a fund that allows investors to invest in a share of several ventures being funded by the platform. This lets investors put relatively small amounts into the platform while gaining the advantage of investing in a number of different entities.
Besides business funding, creatives such as artists, writers, and musicians may also raise money through crowdfunding. Additionally, crowdfunding platforms can provide investors with access to a number of investments in a range of asset classes, including real estate, consumer and corporate debt, private stock, promissory notes, and more.
Private Equity: The Potential for High Returns
Private equity investments have shares that are not publicly traded. These investments might consist of start-ups, growth-stage companies, or buyouts of established companies. Private equity is generally not subject to the effects of movement in the stock market, but these shares may be less liquid than publicly traded shares. Private equity can offer a significant upside in some cases, and if the company does eventually go public, there can be an even greater upside potential.
However, private equity investments are not without risks. They require a long-term commitment and can be highly illiquid. Furthermore, they are usually only available to accredited investors due to their high risk and complexity.
The Importance of Diversification
Alternative investments can be a solid way to diversify your portfolio. They generally have a relatively low correlation to more-traditional investments, such as stocks and bonds. They can potentially mitigate your overall investing risk. However, they also come with their own set of risks and challenges, so it’s important to do your due diligence before investing.
Remember, investing is an individualized endeavor. What works for one investor may not work for another. Therefore, it’s crucial to understand your own investment goals, risk tolerance, and time horizon before venturing into the world of non-traditional assets. With careful planning and thoughtful decision-making, you can harness the power of alternative investments to enhance your financial future.
