When most people think of investing, they think of stocks, bonds and mutual funds.
While these are great investment options, there’s a strong case for including alternative investment classes in your portfolio for greater diversification and a hedge against inflation.
This article discusses seven of the best alternative investment options right now.
7 Best Alternative Investment Classes
Here’s a list of alternative investments to consider.
There’s no one best option — each has its pros and cons, so consider your goals and appetite for risk when choosing between them.
Before making any investment decisions, it’s important to ensure that your current portfolio is optimized for returns while minimizing risk.
Empower’s Investment Checkup Tool is a free tool where you can sync your existing investment portfolio to their app, like a budgeting app. Empower then analyzes your portfolio to provide precise information on whether it’s optimized for maximum returns with minimum risk.
As we explore seven of the best alternative investment options, ranging from real estate to art, we recommend utilizing Empower’s tool to ensure you’re not missing any low-hanging fruit in your existing portfolio.
#1. Crowdfunded Real Estate
Investing in real estate doesn’t have to mean becoming a landlord or taking out a loan. Real estate crowdfunding platforms like CrowdStreet and Arrived offer an accessible way to invest in real estate and potentially generate passive cash flow.
CrowdStreet provides exclusive access to fully vetted commercial real estate opportunities throughout the US, from trendy apartments in Austin to lakeview apartments in Chicago. To invest with CrowdStreet, you need to be an accredited investor.
Open to non-accredited investors, Arrived offers a hassle-free way to invest in rental properties, with investments starting as low as $100. Jeff Bezos backs Arrived, and the platform takes care of all the homeownership responsibilities, including finding tenants and dealing with maintenance requests. You’ll earn your share of rent payments without managing the properties actively.
#2. Private Credit
Private credit investing entails lending money to private companies or individuals in exchange for a fixed rate of return. These are considered high-risk loans, as you’re working with those unable to get a traditional bank loan.
The most common types of private credit investing include merchant cash advances, working capital loans, and hard money loans. These loans are secured by collateral — such as real estate, inventory, or equipment — and have relatively short durations of anywhere from three months to six years.
The private credit market is attractive for high-net-worth investors who are holding cash and looking to diversify into alternatives. Most investors who opt for private credit over real estate are drawn to shorter-duration loans, which provide better liquidity.
For finding private credit opportunities, you can check out Percent. Similar to how sites like CrowdStreet allow people to invest in real estate easily, Percent allows accredited investors to invest in various private credit opportunities.
When we dove into the research for our Vinovest review — a platform that allows non-accredited investors to invest in fine wine — we found the returns nearly matched the S&P 500 over the last 15 years, with much less volatility and a low correlation to stocks and bonds.
The finest wine reaches its highest value between 10-20 years after bottling when it achieves peak maturity. However, it’s not like you can go back in time and produce more of a certain vintage. Plus, some of the original supply never reaches peak maturity because it’s consumed.
That’s why a strategy such as purchasing well-known collections of wine before peak maturity and selling them when they’re at their best has proven to provide high returns with little instability.
Investing in fine wine is a great way to diversify your portfolio and get exposure to an asset class with little correlation to stocks and bonds.
Investing in fine wine through Vinovest can provide a unique opportunity to diversify your portfolio and potentially earn high returns with little correlation to stocks and bonds. With a platform that allows non-accredited investors to invest in fine wine, you can easily start building a collection of well-known wines before they reach peak maturity and potentially sell them for a profit. Sign up for a free account with Vinovest today to start exploring this asset class.
Investing in art has long been perceived as an exclusive realm reserved only for the ultra-wealthy. However, contemporary art has grown by an impressive 14% annually from 1995 to 2020, making it a promising asset for those seeking alternative investment opportunities.
While investing in art does not generate immediate cash flow, blue-chip art can appreciate quickly, particularly when high-net-worth individuals invest in artists who are growing in popularity.
Investing in art may be especially attractive to those with a passion for the arts looking to diversify their portfolio.
Masterworks has made it possible for a wider audience to invest in art by purchasing art pieces through their team of expert art buyers and making shares of each piece available to investors, similar to crowdfunded real estate. The goal is to sell each piece at a profit within three to ten years, providing investors with a share of the proceeds. In case of need, investors can also sell their shares in the secondary market before that point, avoiding having their cash tied up for a decade.
Investing in a masterpiece through Masterworks can be done with a minimum investment starting at around $20 per share, and there is no requirement to be an accredited investor.
If you’re looking to invest in art, Masterworks may be an excellent place to start. However, our in-depth review of Masterworks reveals that it may not be the best option for those looking to invest a significant amount of money.
Farmland is an alternative real estate investment with a long and stable history backing it up. In fact, farmland in the U.S. has provided investors with an average return of 12.24% over the past 20 years, according to one calculation.
Farmland has a very low correlation with stocks. It’s also considered a classic inflation hedge, as real estate and food both tend to rise during inflationary periods.
Best for: Accredited investors with multi-year time horizons who are looking for an inflation hedge and passive income.
How to get started: AcreTrader, available only to accredited investors, allows you to buy shares in specific farms. It offers both cash flow and appreciation potential.
There are limited opportunities to invest in farmland, as profitable farms for sale are rare (and AcreTrader only accepts 1% of the deals that come to them). Nonetheless, when available, farmland can offer investors a good balance of risk and reward.
#6. Angel Investing
It’s called angel investing because the people with the money — i.e., the angels — provide capital to startups when there’s no other source.
It’s risky. Three out of four venture-backed startups fail, which means the best venture capitalists — who, along with their money, also have the knowledge to help the company succeed — still fail 75% of the time.
Plus, even if a company does well, your money may be illiquid for 10 years or longer.
On the flip side, investing early in a future unicorn can net you tremendous gains. It’s not uncommon to return 10 to 30 times your initial investment.
Best for: Accredited investors with a high net worth who don’t have short-term liquidity needs, and who have something to offer a startup beyond their cash (such as expertise or connections).
How to get started: AngelList is a popular platform for connecting startups and investors. Browse available investments and choose to invest directly or along with popular VCs on the platform. For later-stage investing, consider Linqto, which gives you the ability to invest in already-established unicorns. Founders and early employees sometimes want to cash-out their shares before a company goes public; Linqto allows accredited investors to purchase these shares, similarly to how one purchases a stock in a publicly-traded company.
#7. Local Businesses
Investing in a small business can not only be profitable, but is also a way to support your community or an industry you care about.
Like a large corporation, you can invest by taking an equity position or through debt.
While most small businesses aren’t looking to expand and scale to a billion dollar valuation, like venture-backed startups, well-run and proven small businesses operate on very high-margins with little debt.
Best for: Investors who are looking to use their expertise in a local market or niche business.
How to get started: Mainvest allows you to invest in small businesses by providing loans. Minimums start at just $100.
Types of Alternative Investments
The list above outlines some of my favorite alternative investments, but there are even more asset classes that can be used to diversify a portfolio. Here’s a quick, alphabetized list of some of the most popular ideas.
- Debt (such as P2P lending)
- Equipment leasing
- Gold and other precious metals
- Hedge funds
- Intellectual property
- Natural resources (such as oil)
- Private equity
- Real Estate
- Structured products
Final Thoughts on Alternative Investments
The stream of money into alternative investments has grown significantly since the 2008 financial crisis. Diversification, protection against inflation, higher yields and outsized returns are just a few reasons why.
Of course, they come with a different set of regulations, risks and fees than traditional investments. Understanding these risks and associated costs requires more homework than simply dollar cost averaging into a low-cost index fund (which is still a really good strategy).
While that’s not always easy, doing your due diligence is the only way to make sure you’re in an investment that matches your goals.
What to read next: 7 tips for being a disciplined investor in every market.
What, no mention of buying Whisky barrels as a investment? 🏴
Well, there’s an alternative investment class for everything these days. Vinovest allows you to invest in whiskey. 🙂