Investments can be a complicated endeavor. Even the most simple of topics, like stocks and bonds, require careful research to understand what you’re getting into. This article will cover 25 alternative investments that are worth your time and potentially add significant value to your portfolio with little effort on your part.
The “alternative investments examples” is a list of 25 different types of alternative investments that you should know about. These include stocks, bonds, and more.
Publicly traded stocks, bonds, and cash vehicles that include a combination of the three are examples of traditional investments. These assets are most often seen in the portfolios of individual investors and generally feature in your employer’s 401(k) plan. Other asset types, such as alternative investments, may increase a portfolio’s diversification.
Gold, art, and real estate are common examples of alternative investments, but there are many more types as well. Alternative investments, also known as non-traditional investments, are popular among investors because they operate independently of the stock market, possibly increasing returns and lowering total losses during a market slump. That’s especially appealing when the stock and bond markets are experiencing significant volatility.
Alternative investments may also come with additional hazards, such as valuation issues or higher usage of debt, and they also sometimes have less liquidity since they don’t necessarily trade on public markets. Therefore, they are not necessarily suitable for beginning investors. Let’s examine several common alternative investing strategies, their possible advantages, and disadvantages.
7 Investment Possibilities for 2022
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Alternative Investments: What Are They?
Alternative investments are assets that investors choose over conventional ones like stocks and bonds because they feel they have better potential returns and less of a link with them. Hedge funds and private equity are two alternative assets that are exclusively accessible to high net worth, accredited investors because securities authorities see them as dangerous.
Retail investors do have access to a variety of alternative assets, including commodities and real estate.
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1. Property
One of the oldest asset types accessible to investors is real estate. In addition to owning a home, there are other ways to invest in real estate, including owning rental properties, flipping homes, purchasing commercial or industrial properties, and more. Real estate investment trusts, or REITs, are another investment option.
Real estate investing is a popular alternative investment that typically performs well through all economic cycles, although it does take some knowledge, talent, and luck.
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Second, precious metals
Alternative investments that are well-liked include precious metals like gold and silver. Some investors see them as a reliable inflation hedge and secure store of money.
By purchasing precious metals directly, via exchange-traded funds (ETFs), or mining stocks, investors may get exposure to this market. Despite their high levels of liquidity, precious metals may nevertheless be quite volatile during downturns in the stock market.
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3. Basic goods
Investments may be made by individuals in natural resources such as agriculture, metal, and energy. This covers raw resources including maize, meat, sugar, coffee, and sugar. Typically, futures contracts or exchange-traded funds (ETFs) are used by investors to trade commodities.
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4. Limited Partnerships in Oil and Gas (LPs)
To stay in business, oil and gas firms need constant investment. Oil and gas LPs are available for purchase by investors for use in land development, revenue, services, and support. Although they often provide large rewards, these investments might have challenging tax consequences.
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Equity Crowdfunding, No. 5
Through equity crowdfunding platforms, investors may purchase shares of nascent firms. Because investors in this model truly hold stock in the business, it varies from typical crowdsourcing. Because investors might lose all of their money if the business fails, this is seen as a hazardous investment. On the other side, investors stand to win significantly if a business succeeds.
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6. Art
High-net-worth people have often been the only ones able to invest in art, but there are now new methods to enter this market via shares and crowdfunding. Investors who are interested might also purchase index funds that follow the art market.
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7. Wine
Because vineyards only produce a certain number of bottles each year, expensive wine requires an investment. As time passes and there is still a demand for a certain sort of wine, the quantity of bottles produced declines, increasing the value of each bottle. Wine may also be a metaphor for climate change since changes in temperature and precipitation patterns may have a detrimental influence on growing conditions.
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8. Angel and private equity investing
Through private equity or angel investment, individuals may invest in privately held businesses. Either a person or a private equity company may carry this out. Although this is a high-risk investment, it may pay off nicely if a private firm becomes public or is bought.
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9. Digital currency
Cryptocurrency, a more recent addition to the category of alternative investments, is rapidly gaining acceptance as a potential growth asset. More established institutions are using cryptocurrencies in their portfolios as the industry develops and regulation tightens. There are already bitcoin ETFs available for investors that don’t desire diversity inside their crypto investments.
Stablecoins may provide a more acceptable approach to obtain exposure for individuals worried about the volatility of cryptocurrencies. Many of the most well-liked stablecoins are valued at a fixed $1 per token and are linked to the U.S. dollar. The range of interest rates is 4 to 9 percent. They should not be regarded as being as secure as short-term bonds since they are not FDIC guaranteed.
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10. Decorative items
Coins, Beanie Babies, baseball cards, comic comics, and other limited-edition goods are examples of collectible investments. Only what someone else is prepared to pay for a collectible determines its value.
Therefore, even if a certain baseball card or antique toy in its original box may be theoretically worth a certain amount, an investment will only profit if they can find a buyer. Although the majority of collections are too common to have any value, having them may be enjoyable. Through non-fungible tokens, you may even invest in digital treasures (NFTs).
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11. Grave Sites
Burial plots in cemeteries are available for purchase and sale by anyone looking for an alternative to conventional real estate. Burial plot investors buy plots directly from the cemetery, keep them, and then sell them—possibly for more money.
MarcBruxelle provided the photo.
Hedge Funds, 12.
A hedge fund is a pooled investment vehicle that makes investments in a variety of assets, such as commodities futures and publicly traded firms. They often make riskier investments and sometimes gamble against a company’s success by selling short, which may be dangerous.
While some hedge funds are open to all investors, the majority of them need accredited investors. Because they are funds of hedge funds, the funds that are open to non-accredited investors are referred to as funds of funds. This is a deceptive method of investing in hedge funds.
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13. Troubled Debt
Buying up a company’s debt in the hopes that they would be able to repay it is what it means to invest in distressed debt. Because the firms generating the financial instruments are failing or on the verge of bankruptcy, there is a very low chance that they will be able to repay the loan, making investing in distressed debt very hazardous. If they do, the rewards are usually substantial. Investing in ETFs that contain extremely high yield fixed income assets is another option.
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14. Detailed Notes
In the U.S., structured notes are becoming more commonplace and are well-liked in Europe. A financial institution issues structured notes, which combine bond and derivative elements. A structured note’s payoff is intended to be depending on market circumstances. In essence, you often give up some upside to safeguard against sharp falls.
By customizing the bond piece’s maturity, selecting the underlying assets, aiming for a certain payout, and determining the desired amount of protection, an investor or adviser may design a structured note. Although fees have decreased, they might still be expensive. Additionally, there is a risk of default since the structured note is backed by the issuer’s credit.
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Tax Liens 15.
Some local governments auction off their tax liens when borrowers fail on loans and property owners are unable to pay their property taxes. As a result, the towns are able to collect both the unpaid taxes and extra interest. The right to collect payments on the liens belongs to the investors who buy these tax liens. If the property owner is unable to make payments, the lienholder may in certain situations come to acquire the foreclosed property.
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16. Plans for Income-Based Repayment (IBR)
Accredited investors may participate in offers with rewards dependent on the repayment of student loan obligations using IBR loans. In an effort to guarantee a high payback rate, websites selling these goods examine educational institutions and previous default rates.
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Mineral Rights 17.
Mineral rights may be sold to mining firms by owners of real estate that contains minerals. Diamonds, coal, and oil are examples of minerals. Mineral rights may be purchased by investors as a source of revenue as well.
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18. A farm
Farmland generally gains value over time, just like any other kind of real estate. For additional revenue, agricultural owners might sharecrop or rent their property. This is often a lengthy investment.
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Timberland 19.
Since trees normally increase in value over time, investors might purchase timberland with the intention of making money after the trees are harvested. Real property, Timberland traditionally generated returns greater than those of the stock market.
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20. Leasing of Equipment
Investors may purchase shares of funds that hold equipment that is leased to businesses via this long-term investment. This could contain tools for building, medical supplies, or other equipment.
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Trade Finance 21.
Companies must pay import and export taxes on the resources and items they transport across international boundaries. Companies get loans or private investment to pay for these expenses. These transactions may be financed with the assistance of investors, who will also get interest payments.
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Finance for marine and aviation 22
Ships and aircraft are very costly to develop and buy, therefore businesses borrow money or get private funding to finance these endeavors. This kind of investment may be dangerous since the market can be impacted by changes in tariffs or the global economy, but there is also a substantial chance of profit.
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23. Film
Films have the potential to be a lucrative yet hazardous business, but many different things must come together for them to be a success. Although there are hedge funds and private equity funds that invest in films, it is extremely difficult to get started in film investment without having a thorough understanding of the sector.
Geber86 provided the photo.
Franchise 24.
Purchasing a franchise is one option for investors to generate consistent revenue and benefit from growth. McDonald’s, Taco Bell, and Dunkin’ are some examples of well-known franchises. Investors have the option to purchase one or more sites, giving them access to a brand-named company right now. These franchises have the potential to generate revenue as well as profit when they are sold. Franchise investment, however, requires a lot of labor and is not a passive investment.
McDonald’s provided the image.
Intellectual property (25).
Examples of intellectual property (IP) include names, inventions, and pictures. Although IP has the potential to increase in value indefinitely, picking which IP to invest in may be difficult. One strategy is brand investment, which is the search for the next big brand.
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Traditional versus Alternative Investments
Traditional investments and alternative investments vary significantly, yet they also have certain commonalities. Positions in stocks, bonds, cash, and diversified funds are examples of traditional investments. Contrarily, alternatives often consist of real estate, commodities, private equity, and hedge funds. Among the more recent varieties of “alts” you may discover are cryptocurrency and non-fungible tokens.
Compared to stocks and bonds, alternative investments often have lesser liquidity, less regulation, less transparency, greater costs, and complex tax implications. You may also be able to evaluate some of their limited past performance.
Alternative assets are appealing as investment alternatives since they might boost profits while also assisting in further diversifying a portfolio of stocks and bonds.
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How much money need to be devoted to alternative investments?
The choice of how much money to devote to alternative investments actually rests with the individual. You may want to restrict the overall percentage of your portfolio that you invest in any alternative asset class since they are often riskier investments.
You must consider your desired level of liquidity as well as your risk and return goals. If you’re ready to part with your money for a long time, you may be able to profit from the so-called “illiquidity premium,” or extra return brought on by the inability to change an investment into cash. You may be able to commit more money to high-risk, high-return assets if you are risk-averse and have enough of liquidity from other investments.
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Various Investment Techniques
Alternative investments may provide income in a number of different ways. Since every alternative investment is unique, investors should take their objectives into account when selecting assets to purchase. Typically, alternative investments fall into one of three groups:
- Income: Some alternative investments, like a rental property or a franchise, provide a reliable source of income.
- Growth: Over time, the value of this kind of investment increases. Investments in growth include things like wine and art.
- Balance: Some assets provide a good mix of growth and income, such a rental home that may generate both cash flow (in the form of rent payments) and capital gain.
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Alternative Investments’ Benefits
Investors may think about diversifying their portfolio with alternative investments for a variety of reasons. They could provide both the possibility of big profits and protection against stock market volatility. Some advantages of alternative investing are listed below:
- increased diversity of the portfolio
- reduced stock market risk exposure
- Possibility of greater than average returns (for example, top hedge funds aim for returns between 25-30 percent)
- Alternatives exist that provide protection against inflation and increasing interest rates.
- potentially cheaper transaction costs
- Appeal to a person’s own interests, such as their love of wine or art
- Compared to a portfolio that is created for everyone, one that incorporates certain options you personally choose may help you keep to a long-term approach. The endowment effect, a behavioral bias that argues that individuals value things they own more than the identical object owned by someone else, is the foundation for this idea.
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Alternative Investments Have Drawbacks
Alternative investments include drawbacks, just like any other kind of investment. Investors should do thorough due investigation before choosing any alternative investments.
Here are a few drawbacks to think about:
- The ability to invest in risky assets that are not registered with financial authorities is often restricted to accredited investors (those with net worths of at least $1 million or individual incomes of at least $200,000) and qualified buyers.
- Due to a lack of buyers and an accessible market, they may be less liquid than conventional investments. Investors may have to keep their money in the asset for five years or more.
- perhaps requiring large minimum investments
- potentially expensive initial investment costs
- maybe less openness and data availability about performance
- Frequently greater risk or volatility
- Since they are not obliged to register with the SEC, they could not have a clear legal framework.
- If an item is uncommon and there have been few transactions, it may be challenging to estimate its worth.
- Due to their lack of regulation, they are susceptible to fraud and investment schemes.
- Since alternative assets could not be available in a 401(k) or regular IRA account, their accessibility levels may be reduced.
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The Lesson
Alternative investments are a great way to diversify your portfolio, lower risk, and offer the potential for large rewards. Due to the breadth and diversity of these assets, individuals may choose one (or more) that fits their investing preferences and financial objectives.
Any investor who want to add alternative assets to their portfolio must first decide which ones match their particular investment objectives, risk tolerance, and areas of personal interest. In order to limit risk and make the best purchases, it is crucial to do thorough research on each alternative investment choice. Some alternative assets are harder to buy, while others may be bought via funds and ETFs.
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This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
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The “alternative investments investopedia” is a website that provides information on 25 alternative investments. The site also has an investment calculator that can help you calculate the return of your investment.
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