There’s not one facet of modern life that COVID-19 hasn’t upended – least of all the financial markets.
The never-ending roller coaster on Wall Street has prompted many investors to consider investing in anything besides public stocks to avoid the endless speculation that breeds extreme volatility.
Even before COVID-19 hit, many investors were already dissatisfied with Wall Street – with many realizing that attaining financial security through Wall Street investments is a long shot and seeking other options. Lacking income opportunities, appreciation, and security, Wall Street is no longer a viable alternative for achieving wealth in many investors’ minds.
This has all led to an unprecedented desire by investors to seek out alternative investments – investments not tied to Wall Street like stocks and bonds.
Alternative investments have long been favored by institutional investors (pension funds and university endowments), high net worth individuals, and family offices as part of an investment strategy to both help offset market volatility and generate higher returns during downturns.
For new investors interested in investing in alternatives, where to begin?
Let’s start with the definition of an alternative investment:
- An alternative investment, in simplest terms, is a financial asset that does not fall into one of the traditional investment categories such as stocks and bonds.
- An investment, in turn, is a commitment of money or capital in hopes of gaining a financial return.
Based on the broad definition of alternative investment, almost anything could fit within that box.
Who’s to say giving money to your cousin Sal on a Friday with the chance of doubling your money by Sunday night isn’t an alternative investment? It’s a commitment of capital with hopes of gaining a financial return right? By that definition, gambling could be an investment.
That’s why sifting through all of the types of alternative investments can be so confusing to novices.
Take for example this long list of alternative investments:
- Private Equity
- Venture Capital
- Commercial Real Estate
- Private Placements
- Angel Investing
- Private Debt
- Precious Metals (Gold, Silver, Platinum, Palladium)
- Tax Lien Certificates
- Agriculture (Farms, Ranches)
- Mineral Rights
- Water Rights
- Cell Tower Leases
- Oil & Gas LPs
- Network Marketing
- Accounts Receivable Financing
- Hedge Funds
- Insurance Structured Settlements
- Airplane Leasing
- Clean Energy Tax Credits
- Futures /Commodities
- Peer-to-Peer Lending
- Municipal Bonds
- Infrastructure Investments
- Intellectual Property
- Lottery Structured Settlements
- Equipment Leasing
- Housing Tax Credits
- Payday Loans
- Title Loans
- Websites /URLs
- Small Business Lending
- Classic Antique Cars
- Business Development Companies
- Insurance Viatical Settlements
Sifting through the various types of alternative investments and landing on the right one can be daunting but if you know what your investment goals are, you can pare down your list substantially.
The answer to some of the following questions could also help you eventually land on the right alternative investment for you:
- Why are you abandoning Wall Street?
- Are you just looking for a shield from volatility and inflation and most interested in preserving capital?
- Are you looking for an income stream?
- What is your investment window? Long? Short?
- What is your risk tolerance?
- Are you seeking appreciation?
It should be apparent to you by now that not all alternative investments fit into the same mold. Not all alternative investments are created equal.
Different alternative investments serve different purposes and depending on your investment goals, some alternative investments might make a better match than others.
In general terms, alternative investments typically fall into one or more of the following categories:
Income – These are investments that cash flow – give you a cash-on-cash return. Examples of income-producing investments are private debt and franchises.
Growth – These typically involve tangible goods or commodities that do not produce income but could potentially appreciate it. Examples of growth investments include art, gold, fine wine, coins, or gold.
Balance – These investments provide both income and growth. An example of a balanced investment strategy includes commercial real estate, farms, and cash-flowing businesses that all provide cash flows while appreciating over time.
Speculation – Speculatives are assets and financial products that neither cash flow nor show any historical growth – with profits derived solely from someone potentially paying more than what you paid for it down the road or using a derivative strategy based on timing. Examples of speculatives include cryptocurrency and Forex.
There are many reasons the wealthy have long favored alternative investments, but they’re interested in a specific and shortlist of asset classes.
These particular alternative asset classes are ideal during good times and bad – offering higher risk-adjusted returns than their Wall Street counterparts during good times and in bad times, offering a hedge against disaster.
Investors who can wade past the myths that have historically dogged alternative investments can find the path to true wealth many investors have already successfully navigated.
Each week starting “NEXT” week we will help you sift through the individual classes of alternative investments with an overview of their pros and cons.