How to invest in alternative assets
Alternative investments are assets that fall outside the realm of traditional investments, such as stocks, bonds and cash. These can include commodities, real estate, private equity, hedge funds and collectibles like art and wine, which can help investors diversify their portfolios and potentially achieve higher returns.
Whether you’re passionate about a particular asset class or looking for high returns, there’s a strategy to fit your investment goals. The options are wide open, from real estate and fine art, to the safety hedges of precious metals and agriculture. Consider alternative assets to complement a traditional equities-heavy portfolio.
How to invest in alternative investments
Investors are active in the alternative markets. An April 2024 report from investment house J.P. Morgan said that, although the share of alternatives in total investments fell in 2023, the money flowing to other options remains high by historical standards, and is poised to climb higher.
Fundraising has also had a strong start to the year, which, if sustained, would make 2024 a significantly stronger year than 2023.
Nikolaos Panigirtzoglou, global markets strategist at J.P. Morgan
While they often come with higher risk and less liquidity, they can also provide significant rewards and are becoming increasingly accessible to individual investors, if you know where to look.
1. Invest in something you are passionate about
Investing in something you are passionate about makes the process enjoyable and can yield impressive returns. For instance, collectibles like art, wine and rare coins can be lucrative if you have the expertise or a deep interest in them.
The art market, for example, has seen significant appreciation over the years, with some pieces gaining millions in value. Similarly, fine wine investments have historically outperformed many traditional investments. Engaging with a passion-driven investment can lead to a better understanding and higher success rates.
2. Decide how much you can invest in alternative assets
The amount to invest in alternative assets depends on your risk tolerance, investment goals and financial situation. Generally, financial advisors recommend allocating 10% to 20% of your portfolio to alternative investments to achieve diversification without taking on excessive risk. It’s worth noting that some investment houses see up to 30% in alternatives among their private clients, while others see less and recommend no more than 15% investments.
3. Choose a trusted platform that suits your investment
Explore a range of alternative investment platforms, each tailored to different asset classes and strategies, so you can find the right fit for your specific investment goals.
Masterworks is a unique investment company offering the ability to add a new asset class to your portfolio. Even if you’re not wealthy enough to buy a Monet or Basquait outright, you can still add their art to your portfolio.
You can take advantage of the long-term market potential of this precious metal by starting a Precious Metals IRA with help from Thor Metals. Enabling investors to include gold or silver in their portfolio, a Precious Metals IRA can be a secure and stable investment option, enhancing diversification and safeguarding your cash value against economic uncertainties.
Real estate crowdfunding companies are incredibly popular these days. And for investors who want to dabble in real estate without becoming landlords themselves, real estate crowdfunding sites like Arrived offers a simple, effective solution.
4. Compare alternative investments to S&P 500
Alternative investments often have the potential to outperform traditional investments like the S&P 500, though they come with higher risks. For example, private equity and hedge funds have historically provided substantial returns, compared to the S&P 500.
According to Preqin, an investment data company that specializes in alternative assets research, private equity funds have generated an average annual return of around 14% over the past decade, significantly higher than the S&P 500’s average return of about 10%. Real estate, another popular alternative asset, has also shown competitive returns, especially in booming markets.
What are examples of alternative assets?
- Real estate
- Private equity
- Commodities (gold, silver, oil)
- Hedge funds
- Art and collectibles
- Cryptocurrencies
Real estate investment
Real estate remains one of the most popular alternative investments. Investing in rental properties, commercial real estate or real estate investment trusts (REITs) can provide a steady income stream and potential for appreciation. Real estate investments are tangible assets that can hedge against inflation. Moreover, they offer tax benefits, such as depreciation deductions and potential capital gains tax advantages.
Private equity and venture capital
Private equity and venture capital involve investing directly in private companies or startups. These investments can yield substantial returns, especially if the company grows significantly or goes public. Private equity typically involves investing in established companies that are not publicly traded, while venture capital focuses on startups and early-stage companies with high growth potential. Both options require significant capital and a long-term commitment, but the rewards can be considerable.
Commodities
Commodities, such as gold, silver, oil and agricultural products, offer another alternative investment avenue. Investing in commodities can provide a hedge against inflation and currency fluctuations. For example, gold is often considered a safe haven asset during economic downturns. Commodities can be invested directly, through futures contracts, or via exchange-traded funds (ETFs) specializing in these assets.
How do alternative assets work?
Alternative assets provide investors with opportunities outside of traditional markets. They often have lower correlations with standard asset classes, offering diversification benefits. These assets can be more complex, require more research and may involve higher fees and longer investment horizons. Their performance can be influenced by unique factors, such as market demand for collectibles or the operational success of private companies.
Know before you invest in alternative investments
Finding a trusted provider or platform is crucial. Look for platforms that offer transparency, have a strong track record and provide educational resources to help you make informed decisions.
What to look for:
- Transparency in fees and operations: Choosing a platform that clearly outlines its fee structure and operational processes is essential. Hidden fees can significantly affect your returns, so a transparent fee schedule ensures you know exactly what you are paying for. Additionally, understanding how the platform operates, including its investment strategy and risk management practices, can help you make more informed decisions.
- Strong performance track record: A platform with a proven history of delivering consistent returns over time is generally more reliable. Look for platforms that provide detailed performance data, including historical returns, risk metrics and comparisons to relevant benchmarks. This information can give you confidence in the platform’s ability to manage investments effectively and achieve your financial goals.
- Educational resources and support: Comprehensive educational materials can help you better understand the intricacies of alternative investments. Look for platforms that offer webinars, tutorials, articles and customer support to answer your questions. These resources can enhance your investment knowledge and help you make more informed decisions.
- User-friendly interface and tools: An intuitive and easy-to-navigate platform can significantly enhance your investment experience. Features such as real-time portfolio tracking, customizable alerts and detailed analytics can help you manage your investments more effectively. A well-designed interface can save you time and reduce the likelihood of errors.
- Good customer reviews and reputation: Researching user reviews and the platform’s reputation in the industry can provide insights into its reliability and customer service. Look for platforms with positive feedback from a large user base and check for any regulatory issues or complaints. A strong reputation often indicates a trustworthy and well-managed platform.
FAQs
JP Morgan, What to know about alternative investments in 2024
Chris Clark is freelance contributor with MoneyWise, based in Kansas City, Mo. He has written for numerous publications and spent 18 years as a reporter and editor with The Associated Press.
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