What are alternative investments?
With alternative investments becoming increasingly popular, this article deep dives into your options and what they mean for your finances.
Summary
Alternative investments are financial assets that do not fall into a conventional investment category.
They include cryptocurrencies, art, collectibles, commodities, and real estate.
Alternative investments require complex trading strategies, so they require professional oversight.
If you want to include alternative investments in your portfolio, it’s crucial you get expert financial advice.
What are alternative investments?
Simply put, alternative investments are financial assets that do not fall into a conventional investment category, such as a stock or bond.
Alternative investments can include cryptocurrencies, art, collectibles, private equity or venture capital, hedge funds, commodities, and real estate.
One of the biggest ways these investments, sometimes referred to as alternative assets, differ from conventional investments is their liquidity.
Alternative investments cannot be easily sold or converted into cash. For example, if you have a high-value piece of art, you may find it more difficult to sell than traditional stocks and shares.
It’s also worth noting that alternative investments are subject to much less regulation than traditional investments.
While they can be examined by the U.S. Securities and Exchange Commission (SEC), they do not have to register with them, so they are not overseen by the SEC in a way mutual funds and ETFs are.
This means investors must do their own due diligence when investing in an alternative asset.
What are the different types of alternative investments?
As mentioned, there are multiple different types of alternative investments, including:
1. Cryptocurrencies
Cryptocurrencies are a relatively new investment type. Due to this, they are categorized as an alternative investment as they don’t easily fit into existing investment categories.
Cryptocurrencies are a form of digital money that allows payments to be made electronically, such as Bitcoin.
A central governing body does not issue these currencies, so they are not subject to government oversight. While many will see this as a positive, it does pose a substantial level of risk.
2. Art and collectibles
Art and collectibles may not jump out as obvious investment strategies, but buying these assets wisely can lead to huge payoffs.
Collectibles can include many things, such as:
Wine
Stamps
Mint-condition toys
Antiques
Furniture
Cars
Investing in art and collectibles means you purchase these assets and keep them in good condition, in the hope their values increase over time.
While this may sound easy and fun, you need to be wise with your purchases and recognize what items that will grow in value.
3. Real estate
While real estate is considered an alternative, it is a common investment. Its stability makes it one of the safest investments.
Real estate is the largest of the “real assets” and is the biggest asset class in the world.
Other real assets include land, farmland and timberland – all of which, alongside real estate, are considered alternative investments.
Real estate provides you with an abundance of investment options, from buying a property to renting, flipping a property, or investing in a real estate investment trust (REIT).
A REIT is a company that owns, operates, or finances income-generating real estate.
REITs provide investors with a steady income stream, but they’re not the best choice if you want to maximize your capital appreciation.
4. Commodities
Commodities can also include real estate, but the term is often used to refer to natural, raw materials such as gold, silver, precious metals, oil, natural gas or agricultural products.
Commodities are often seen as a wise investment if you’re worried about the impact of inflation, as the value of these assets is not as sensitive to public equity markets.
The value of these assets is instead closely linked to supply and demand. For example, if gold is in higher demand, the value of your gold will grow and vice versa.
Why invest in alternative investments?
While alternative investments are complex, they could provide you with a good return on investment should you be successful.
However, it’s vital you know the pros and cons of alternative investments before you take the plunge:
The advantages of alternative investments
Alternative investments can diversify your investment portfolio and reduce its overall risk.
While they are riskier investments, they can provide higher returns compared to traditional investments.
With alternative investments, you access markets unavailable to traditional investors.
Alternative investments are becoming increasingly popular in the investment landscape, meaning if you were to invest now, you could be able to get in at the beginning and potentially grow your investments for longer.
The disadvantages of alternative investments
Alternative investments are more complex than conventional assets, which could pose more risk if you do not fully understand them.
They also usually require investors to be accredited.
Alternative assets are less liquid, which makes them more difficult to sell quickly if you need to.
They require complex trading strategies, which means some investors may struggle to understand them.
How much tax will I pay on alternative investments?
Many alternative investments have different tax rules compared with traditional investment assets. This means investors may have to pay more tax when profiting from an investment.
It’s also important to note that the IRS may not allow you to use the same tax deductions on these assets that you can use with traditional investment assets like stocks and bonds.
Take art and collectibles, for example. Collectives are one of the few items the IRS will tax above 20%.
Net capital gains from selling collectibles (such as coins or art) are taxed at a maximum 28% rate.
When deciding to invest in alternative assets, it’s important to do your research on how much tax you may have to pay on any profits.
A financial advisor can help. They can help you navigate the complex work of tax and alternative investments and help you find ways to minimize your tax burden.
How can I invest in alternative investments?
While it can seem like an exciting and new endeavor, entering the world of alternative investments requires a lot of effort and work to get right.
According to the U.S. Bank Wealth Management, alternative investments require complex trading strategies and professional oversight.
If you want to start investing in alternative assets, you must get the right advice from a regulated professional.
Unbiased is a good place to start.
Here, you can get matched with an independent SEC-regulated financial advisor who can ensure you’re getting the most out of your investments and create an investment strategy that will make your money work harder.
Senior Content Writer
Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.