Alternative investments are a diverse class of assets, ranging from hedge funds and real estate to commodities like precious metals. Essentially, an alternative investment is anything other than the traditional categories of public stocks and bonds.
Although alternative investments were primarily employed by institutional investors like pension funds in the past, a wide range of alternative investments are now available to individual investors as well.
Historically, investors have considered bonds to be a safe and conservative investment, and they often followed the traditional advice to increase the percentage of bonds in their portfolios as they got closer to retirement. Bonds can still be an important part of an investment strategy, but because of today’s low interest rates, some investors are exploring different options. In addition, people are living longer than ever before, which means they need a more robust portfolio to support them through a longer retirement period.
It’s prudent for people to talk with an established, trustworthy investment advisor to ensure they have a plan that can lead to a secure and comfortable retirement.
Important Attributes of Alternative Investments
There are a few key factors to think about when considering alternative investments, because they can differ significantly from stocks and bonds.
- Alternative investments are often not regulated by the U.S. Securities and Exchange Commission (SEC).
- Usually, alternative investments are illiquid, meaning that they can’t easily be sold or converted into cash quickly. In some cases, there is a minimum or fixed period of time that you must keep your money invested.
- Typically, alternative investments do not correlate with the stock market, which means that their performance does not improve or decline along with the stock market and other traditional assets.
Alternative Investments Can Diversify Your Portfolio
Because alternative investments do not always correlate with the stock market, they can be a good way to diversify a portfolio. If the stock market isn’t performing well, then there’s a chance that an alternative investment may do better. Having some of one’s nest egg in alternative investments can therefore mitigate the risk an investor might be exposed to if all of their money was in stocks.
While there are many alternative investments that can be used to diversify a retirement portfolio, this article focuses on two key options: real estate and private equity.
Real Estate as an Alternative Investment
Real estate is one of the most common alternative investments, and it offers great advantages. When you invest in real property, there’s a chance that its value will appreciate over time. In addition, you can charge rent for the property, which in many cases will cover the costs of the mortgage and maintenance.
However, not everyone wants to become a landlord. Choosing a property with good investment potential can be tricky, and there are many legal and financial factors to consider. In addition, finding tenants and maintaining the property can be a lot of work. You can hire a property manager to handle this for you, but then you’ll be adding to your expenses.
A simpler and easier way to invest in real estate is to passively invest in residential, industrial, or commercial real estate through a variety of methods. Some people choose a Real Estate Investment Trust (REIT), but because many of them are publicly traded, you may lose some of the diversification benefits that come with other methods of investing in real estate. Real estate crowdfunding, another way of passively investing in real estate, typically doesn’t correlate to the stock market, so it can be a good option for diversification.
Is Real Estate Crowdfunding for You?
Real estate crowdfunding usually requires a lower minimum investment than other forms of passive real estate investing, allowing individuals to invest in bigger deals and different kinds of properties than they could afford on their own. And the deal manager or sponsor takes care of choosing and purchasing the property, as well as the ongoing property management and maintenance. When compared to buying a rental property outright and managing it on your own, it is much simpler and easier to passively invest in a property through real estate crowdfunding.
The first step in real estate investing is choosing the right property, and there are many factors to consider, from the property’s location and condition to the state of the local rental market. Therefore, it’s important to choose a crowdfunding platform that has experienced underwriters, like ArborCrowd, which is part of The Arbor Family of Companies, who can weigh the pros and cons of each property and choose the ones with the best potential. Learn more about how real estate crowdfunding works to decide whether it’s right for you.
Private equity is another popular alternative investment. With private equity, capital is invested in private companies that are not listed on a public stock exchange. In the past, most private equity opportunities were restricted to institutional investors, such as pension funds and hedge funds. Today, there are more opportunities for individual investors to participate as private equity funds and other regulated investment vehicles for private equity investing are becoming more easily accessible.
However, private equity can be riskier than other alternative investments, especially investing a lot of money into one company. If the company does poorly or fails, one could lose some or all of their investment. One way to reduce this risk is by spreading investable dollars across a range of private companies through a private equity fund.