How to buy alternative investments: Do you want to invest?

If you're seeking greater diversification, potential for strong returns, and reduced correlation with conventional stocks and bonds, alternative investing could be the right choice. These assets encompass commodities, real estate, cryptocurrencies, art, wine, and others. Once reserved for wealthy, accredited investors, alternative investment opportunities are now accessible to anyone through crowdfunding platforms and funds. It's important to note that in return for the prospect of enhanced diversification and higher returns, you may encounter limited liquidity in many instances. Continue reading for a guide on getting started with alternative investing.

Understanding alternative investing

Interest and opportunities in alternative investing have grown significantly since the 2008 recession, the decline in the stock market, and the mortgage market crisis. When traditional markets faltered, investors sought out investments that didn't move in sync with stocks and bonds. Alternative investments typically become more attractive during periods of increased volatility in equity markets and economic downturns.

Alternative investment vehicles include assets that are outside the usual realm of stocks and bonds. These opportunities were historically accessible only to the extremely wealthy but are now available to smaller investors as well.

Examples of alternative investment vehicles include:

• Precious metals like gold and silver
• Fine art
• Wine
• Real estate
• Hedge funds
• Private equity
• Cryptocurrencies
• Private and distressed debt

Millennials and newer investors have shown a strong interest in alternatives, partly influenced by endorsements from celebrities such as Matt Damon and Reese Witherspoon highlighting their benefits. Access to alternative investments has been facilitated through crowdfunding platforms like Fundrise and Crowdstreet, private funds, publicly traded real estate investment trusts (REITs), and managed exchange-traded funds (ETFs).

Alternative investments vs stocks

Alternative investments and stocks differ in several key aspects:

• Return potential and volatility: Stocks historically offer an average annual return of over 9%, but this includes years with significant declines such as the -18.01% drop in 2022 and the -36.55% crash in 2008. Alternative investments can vary widely in returns depending on the asset class, ranging from around 5% for debt funds to potentially double-digit returns for certain real estate partnerships and specialized products.
• Correlation with stock market: Stocks are highly correlated with the stock market's performance. In contrast, alternative investments aim to have lower correlation, meaning their value may not move in tandem with traditional stocks and bonds. This can provide diversification benefits by reducing overall portfolio risk.
• Access and liquidity: Investing in stocks is generally straightforward with high liquidity, allowing investors to easily buy and sell shares. Alternative investments often have limited liquidity, meaning it may be more challenging to sell or exit investments quickly, and they may require longer investment horizons.
• Risk profile: Stocks are considered high-risk assets due to their volatility and market exposure. Alternative investments can vary widely in risk, with some like hedge funds or cryptocurrencies carrying high risk, while others such as real estate or private equity may offer more stable returns but with longer lock-up periods and less liquidity.
• Regulation and accessibility: Stocks are regulated by securities laws and are accessible to a broad range of investors through stock exchanges. Alternative investments are often subject to different regulatory frameworks and were historically restricted to accredited or institutional investors, although access has expanded through crowdfunding platforms and specialized funds.

Overall, while stocks offer potential for strong returns and liquidity, alternative investments appeal to investors seeking diversification, lower correlation with traditional assets, and potential for different risk-adjusted returns. Choosing between them often depends on an investor's risk tolerance, investment goals, and portfolio diversification strategy.

Purchasing alternative investments

The process of acquiring alternative investments varies depending on the platform and the type of assets involved. If you're buying alternative ETFs or mutual funds, you'll need to open an investment brokerage account. Alternatively, if you're purchasing through standalone firms such as Cadre, Peer Street, Realty Mogul, or Arrived, you'll follow their specific account setup procedures.

Here's a typical procedure for buying alternative investments:

• Create an account: Sign up on a reputable alternative investing platform like Fundrise, Yieldstreet, or Crowdstreet. During registration, you'll need to verify your identity with a government-issued ID.
• Link a bank account: Once your account is set up, link a bank account to facilitate fund transfers. This step allows you to add funds for purchasing alternative investments. Different platforms may accept various payment methods, so check the accepted options for your jurisdiction.
• Select investments and transfer funds: Choose from the available investment opportunities offered on the platform. Specify the quantity of shares or units you wish to purchase and the type of investment. After selecting your investments, you'll be prompted to transfer funds from your linked bank account. Any unused portion of transferred funds will remain as a cash balance in your account for future investments.
• Accredited investor requirements (if applicable): Some alternative investments are limited to accredited investors. To qualify, you must demonstrate eligibility based on criteria such as a net worth exceeding $1 million (excluding primary residence) or meeting specific income thresholds for the past two years. Verification may require documentation proving your financial status or professional credentials.

If you're interested in investing in art or wine, there are several avenues. For example, you can use crowdfunding platforms like Yieldstreet or Masterworks. Alternatively, you can engage specialty dealers or participate in auctions for direct purchases and sales.

Understanding the specific requirements and procedures for each platform or investment type is crucial to effectively navigate the process of purchasing alternative investments.

Advantages of alternative investments

Alternative investments offer the appeal of reduced correlations with stocks and bonds, a feature that has long attracted pension funds and institutional investors. However, categorizing all alternatives under a single umbrella oversimplifies their diversity. Within this broad category, various types of investments exist. For instance, commodities can serve as a hedge against inflation, safeguarding capital during price surges. Investments that move independently of stocks and bonds can fortify financial portfolios during periods of market turbulence. Specific alternatives, such as hedge funds and private real estate ventures, present potential for higher returns and less correlation with traditional assets.

For investors seeking diversification beyond conventional stocks and bonds, alternative investments provide an avenue that potentially enhances overall returns while reducing volatility. Today, alternative investment opportunities are accessible to all investors, although some argue that the most advantageous opportunities remain reserved for accredited investors with substantial wealth.

Disadvantages of alternative investments

While alternative investments offer the potential for higher returns and reduced portfolio volatility, these benefits are not guaranteed. Some private alternative investment vehicles lack SEC regulation, increasing their inherent risk. The pursuit of higher returns often comes with a heightened risk of loss. Additionally, the managers of alternative investments may not possess the same level of expertise and oversight as those managing highly regulated mutual funds and ETFs.

Alternative investments can also introduce complexities in tax reporting, potentially leading to additional challenges during tax preparation.

Many alternative investments feature long lock-up periods and limited liquidity, meaning investors may not be able to access their initial investment for months or even years. Exclusive opportunities often cater only to accredited investors with substantial wealth. Fees associated with alternative investments can be considerable, often surpassing the modest expense ratios typically found in ETFs and mutual funds. Moreover, unlike bonds and many stocks that generate income, alternative investments such as commodities, precious metals, art, and wine typically do not provide regular cash flow.

Navigating these drawbacks requires careful consideration of risk tolerance, liquidity needs, and investment goals when incorporating alternative investments into a diversified portfolio.