For the investor who has built a large portfolio of traditional assets such as domestic, large cap stocks, mutual funds and perhaps some traditional real estate, investing in alternative asset classes is the next logical step in building multigenerational wealth.
Alternative asset classes can often be risky. Unlike your index or mutual funds, many are illiquid, meaning that once you are in them, it’s hard to get out. If you think you may need the cash within a few years, you should probably think twice about many of these types of investments. The time to invest in these assets is once you have a steady, reliable income to live off of, and a rock solid nest egg of traditional stock market assets to fall back on and use in retirement.
Some examples of alternative investment strategies include:
- Private equity: Private equity is one of the most common ways to start investing in alternative asset classes. There is a high barrier to entry for most private equity investments, but most people shouldn’t be investing unless they are plenty financially secure to begin with. Most investments require an investor to be accredited, which usually means a net worth, minus the equity in the primary residence, of one million dollars. Most private equity investments have a minimum investment of $25,000 as well. While risky, getting in early on the next Uber or Netflix may pay off handsomely. Instead of investing in one single company, a better way may be to invest with a private equity firm that does the research and investing for a pool of investors, with them collecting a fee for their expertise
- Hedge funds: Hedge funds use a variety of tactics, such as short selling and leveraging, to try to generate returns in any market conditions. Hedge funds are often only available to accredited investors and charge high fees.
- Cryptocurrencies: Crypto is the hottest and trendiest alternative asset class to come around in years. It does appear that crypto will be widely adopted by world financial markets, but it is still a very risky investment. Major institutions are trading crypto including well known names such as JPMorgan and Goldman Sachs, but it is by no means a guarantee that major declines are not still in store for crypto.
- Real estate: Real estate investments can take the form of buying physical property or investing in real estate investment trusts (REITs). REITs are companies that own and operate income-generating real estate, such as office buildings and shopping malls. Another great index like fund that was recently launched is Cityfunds. They pool investors’ money and invest in residential real estate in cities around the country. It is a great way to diversify your portfolio if asset classes such as wine and crypto seem a little to exotic for you. All types of alternative asset classes can be added to a portfolio, as long as the same due diligence is practiced as with any investment.
- Art and collectibles: Art and collectibles can also be good investments in the right circumstances, but tend to be very illiquid. The new blockchain based NFTs fall into this category as well as more traditional investments such as baseball cards and paintings. Obviously, it’s a bad idea to start investing in this class unless you are already financially secure, but for certain people, especially those with a passion for whatever they are collecting, it can be both fun and lucrative. There are also plenty of apps on the market that let investors easily begin investing in this asset class.
- Commodities: Commodities can provide an easy way to get involved in alternative asset classes, often with a much lower minimum investment than private equity. Investors can buy commodities from the Chicago Mercantile Exchange, or some fund families, but not all, have commodity funds. Similar to mutual funds, these funds bundle a basket of commodities in a single asset making it easy to buy and sell a diversified portfolio of commodities.
It is important to carefully consider the risks and potential returns of any alternative investment strategy before making a decision. It may be wise to consult with a financial professional to determine if an alternative investment strategy is appropriate for your individual circumstances.