Alternative investments can be a great way to diversify your assets and isolate yourself from public stock market volatility. Here is a guide to investing in alternative investments and how to make money along the way.
Alternative Investments 101: How to Invest in Different Assets
High-income individuals are always looking for more and more ways to invest and make money.
In most cases, traditional investment platforms are simply not enough, as with more savings, you may want to diversify your income, ready to take higher risks for high returns, which is not often possible with traditional investment opportunities.
This is where alternative investments come in, providing high-net income individuals a wide range of additional investment opportunities.
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Should High Net Worth Individuals Consider Alternative Investments?
Alternative investments like private equity, hedge funds, trading, distressed real estate, and similar opportunities are all the rage. You frequently see these money managers in the media, but where are the investors in these funds?
Is it really worth it to be involved as a high income or high net worth individuals?
Fees for these types of investments are often extraordinarily high. The fund managers behind these investment strategies are likely making piles of cash managing and investing your money.
I’ll evaluate in this in-depth guide everything you’d need to know about alternative investments and if you should consider them as a high net worth individual.
What Are Alternative Investments?
Conventional investments usually include stocks, bonds, and cash. Investments besides these traditional investments can be considered as alternative investments. These usually have high minimum investment and may even incur a lot of fees.
Another major difference between conventional and alternative investments is that the latter are usually illiquid. Unlike stocks, you may not be able to get analytical data to foresee the performance of your investment.
In fact, most alternative investments are not regulated by the Stock Exchange Commission.
For these reasons, these investments are more suited for high net worth individuals and high-income earners who want to diversify their investments.
Over time alternative investments can yield significant returns, provided you have a sound strategy in place.
List of Alternative Investments
You can choose from many different kinds of investments that qualify as an alternative investment. To give you an idea, here is a quick list:
- Real Estate
- Private Mortgages
- Flipping Properties
- Tax Liens
- Private Company Stocks
- Venture Capital
- Private Equity
- Hedge Funds
- Storage Units
- Structured Settlements
- Precious Metals
- Antique Cars
Want exposure to these different investments? You can use a platform like YieldStreet to start investing in alternative asset classes.
See Related: How to Sell Jewelry Online
Why Invest in Alternative Investments
Investing in alternative assets, as a high-income earner, can help diversify your investment portfolio. These typically have a low correlation with stock and bond markets. They can even move opposite the market trends.
Some of these investments, such as gold or diamonds, can have a hedge effect against inflation. Inflation is simply inevitable in most situations that ultimately reduces the purchasing power of cash. Therefore, you should invest in areas that are not as vulnerable to inflation.
There has been a growing trend of uncertainty in stock markets. Alternative investments have provided individuals a mean to put their money to work for them.
Since there are so many options, you have the liberty to choose according to your own interests and knowledge.
However, this is also true that many new alternative investment structures are unregulated. Also, there is a risk of loss. However, it is still a viable way to increase your wealth.
Use a tool like Personal Capital to track your net worth for free. You can add in your stock market holdings as well as your alternative investments.
The app comes with a free retirement planner that will help you ensure you are on the right track for retirement.
How to Evaluate Alternative Investments?
When evaluating an investment, you have to look at historical risk-adjusted returns. These returns are both short-term and long-term.
Most of the time, investors look at the information regarding the asset managers to evaluate funds and other alternative investments. Asset manager’s history and ability to participate in market gains and mitigating risks is what helps investors make the call.
Any of the claims by fund managers should be verifiable. Other measures of historical returns on an alternative investment may include volatility, cash flow-adjusted returns, and Sharpe ratio.
You will have to analyze the data available carefully as these evaluations tend to be more subjective.
In general, it can be difficult to evaluate the value of an alternative asset. With real estate, it should not be so difficult as you can do a market survey to get a value estimate.
However, some alternative assets can be downright impossible to value for someone who is not familiar with them.
For instance, if you are buying a 50-year old vine bottle, it would be hard to find out how much it’s worth. A sommelier, on the other hand, may be able to estimate the closest number.
See Related: How to Trade Options for Income
Pros and Cons of Alternative Investments
A pros and cons analysis of these types of investments will help you weigh your options.
Limitations of Alternative Investments
I always like starting with the cons or limitations in my analysis. It helps me to be a bit more pessimistic before I realize the optimism.
One of the biggest drawbacks of alternative investments is high fees. This could be incurred in different forms. Most hedge funds and high net worth individuals pay fund managers to manage their investments.
Even a 2% fee, which is a de facto fee for private equity and hedge funds, can be a lot if the fund is quite big. In some cases, the funds may turn into ‘zombie’ funds.
Such funds keep incurring fees without making any considerable gains or profits. Why would anyone pay high fees when you can even trade commission-free or participate in micro-investing?
Well, it’s all about the value you get from the right manager. Reduce your fees to $0 by using a completely free investing platform like M1 Finance.
I’ve used M1 Finance to automatically invest in low-cost index funds. There are no commissions and no required work. You simply transfer money into a “pie” and M1 Finance will automatically invest it.
Uncertain Risk Exposure
Alternative investments may be lucrative, but they are not without risks. There is a risk of total loss with many such investments and assets. The complexity of such investments usually means that it is difficult to mitigate risks.
The whole concept of alternative investments is volatile, but it can be reduced through diversification. This is what fund managers’ main job is, to ensure that the investor’s money is invested in many different assets.
Most alternative investments are illiquid and difficult to exit. If push comes to shove, you might have a difficult time encashing the investment.
Even with regular redemption policies, fund managers may not be able to make redemptions simply because of the illiquid nature of the investment.
Those alternative investments that make regular cash distributions, like rental real estate, are a tad bit more liquid. If you want to exit an investment, you cannot just do it instantly like you would with stocks in a sought-after company.
For instance, a famous painting may take weeks to be sold. Similarly, investors in venture capital may not be able to get out until ten years.
Even then, only if the company goes public or gets acquired.
Reasons Why Alternative Investments Can be a Good Option
These are some of the most important advantages of pursuing alternative investments:
With alternatives, you can pick fund managers that focus on a particular strategy. One of the primary strategies, especially in the real estate sector, is a value-add strategy.
If the fund manager focuses on this particular strategy, the potential gains can be quite high.
It also depends on the economic conditions domestically, as well as globally. However, they need to have a detailed understanding of the assets.
There needs to be a strong business plan, so to speak, to improve income in a short time.
Isolated Market Risk
Depending on the asset class within alternatives, you can shelter yourself from any market conditions. Since there is very little correlation with stock markets, your investment may be indifferent to the ups and downs of stock prices.
Many high-income individuals invest in alternative class assets to counter their investments in conventional assets, i.e., stocks and bonds. The key to a profitable investment portfolio is diversity. It’s also the approach to reduce risks associated with alternative investments.
Such investments are not prone to inflation most of the time, which is the most attractive thing about them. They can easily be adjusted for inflation as opposed to paper money.
They provide an inflation hedge to high-income earners and institutional investors.
You pay high fees because of the value add the underlying manager provides, as well as the resulting potential for outsized returns.
Is every fund manager going to outperform? No.
Actually, there is some stark evidence that more managers underperform than outperform.
That leaves us to consider, should you consider investing in private equity? The answer lies in outsized returns. Those investors who put money in early-stage investments can walk away with huge profits. However, it’s not a surefire way.
If we look at the technology sector, it has made people very rich. Such companies have historically had massive growth. Investing in private equity at an early stage does not cost you a lot of money.
However, it has great potential in the long run.
Even in the case of a loss, since the investment was not that big, to begin with, your portfolio does not get a major dent.
Outsized returns are what makes private equity so attractive to institutional investors.
Trending Alternative Investment Options for High-Income Individuals
Convincing enough? So what is the next step? Finding the most profitable, low-risk alternative options, right? Don’t worry, I’ve listed some of the best options for you.
Real Estate (Physical or Crowdfunding)
One of the most popular options is the real estate and for all the right reasons. However, there is a modern twist with all the technological advancements around us.
In addition to buying physical properties, that often requires a large sum of money, you can now diversify your real estate portfolio using crowdfunding platforms, by dividing the investments. It’s a great way to transition to a more passive real estate investing strategy.
So what does this mean?
You can now use a real estate crowdfunding platform to invest in a proportion of the property with other investors. The platform, often online, manages properties and your investment, and shares and returns with all investors according to their investments.
You can use a platform like Fundrise to sign up for real estate investing instantly and have not transaction fees. You’ll be investing in private real estate in no time.
Want to do direct investing with real estate? Use my free financial model that will guide you in your valuations of rental properties.
See Related: Free Rental Property Excel Spreadsheet
One of the recent rages is buying art and other classic antiques. For example, buying antique cars and art. In fact, if compared to other options like real estate and gold, it is rated as the top-performing asset class last year, according to the Wall Street Journal.
Fortunately, there is also a crowdfunding option available, just like real estate. One such platform is Masterworks that allows you to buy art along with other investors.
In addition, there are also other investment options that include commodities, cryptocurrency, jewelry, storage units, stamps, and a lot more.
Use YieldStreet to get exposure to art investments with ease. It’s free to sign up and browse the various investment opportunities.
Conclusion on Alternative Investments
As a high-income individual, you have money to invest in alternative assets. Stocks remain a highly popular investment, but for someone just coming on the scene, it may not be as profitable or tolerable. This is where alternative investments come in.
As there are so many options, you can diversify the investments to reduce risks. If you choose a fund manager with a proven track record, you are likely to make considerable gains on your investments in a few years’ time.
In certain cases, you may even get tax reductions by investing in some assets. This is common in Europe where high-income earners and companies can get tax breaks by investing in startups.
As long as you are actively involved in the investments, you can ensure that you get the best out of them.
The Alpha financial perspectives will help you find new ways to make money, which are aggressive, unknown and require significant hard work. Use Personal Capital to monitor your cash flow and net worth.