Many types of alternative investments are growing in popularity, for a wide range of reasons. There’s no sugar-coating it, though: any investment comes with a certain amount of risk. Whether that risk means a minor dip in performance or a significant falling-out of an entire industry, it’s always wise to consult a financial advisor and do your research before investment. One strategy that people use to attempt to minimize risk is portfolio diversification. Alternative investments—defined by Investopedia as “financial [assets] that do not fit into the conventional equity/income/cash categories”—are of particular interest for diversification.
In this article we’re going to answer a few of the questions we hear the most about this investment type, including some of the common alternative investments for 2023 and beyond.
What Are the Objectives of Alternative Investments?
The primary objective of an alternative investment is to attempt to mitigate risk through portfolio diversification. When an investment portfolio is too reliant on one type of investment, it brings the “don’t put all your eggs in one basket” adage to mind. Perhaps most importantly, in the case of a potential recession, alternative investments can provide an important preventive cushion—potentially the difference between a setback and a catastrophe.
Are Alternative Investments on the Rise?
They certainly are! As Forbes notes, “the investment landscape is changing,” a transformation that is “fueled, in part, by an increased understanding of and access to alternative investment options.” While conventional wisdom has often centered around a 60/40 portfolio (60% public equities, 40% fixed income), modern experts point to alternative investments as a crucial piece of the pie. Among the recommendations are a shift toward “30% alternatives, 40% equities, and 30% fixed income” for a more balanced and resilient portfolio.
Why Are Alternative Investments a Good Idea for the Future?
Alternative investments may provide a number of compelling benefits as part of a balanced and diversified portfolio. Some of the biggest advantages of this strategy can include:
- The potential to see higher returns.
- Reduced dependence on traditional markets’ performance.
- Hedging potential risk and improving chances of payoff.
- The ability to diversify a portfolio by combining common investment types with alternative asset classes.
- Potential insulation against periods of significant market downturn.
What Are the Most Popular Alternative Investment Options?
There are several different types or categories of alternative investments, with five of the most popular alternative asset classes including:
- Real Estate | Widely considered to be the most popular alternative investment, real estate investing can provide investors with a reliable source of rental income. It can also set up potential for a substantial payday, when or if they decide to flip or sell the property at some point.
- Private Equity | Investing in private equity means purchasing a stake in a private company and then monitoring that company’s revenue and performance. Ideally, that company’s stake will rise, increasing the investment’s value. As noted by Sturm College of Law, though, the game has changed and modernized, as “there is today an increasingly massive and variegated industry” around private equity investing.
- Private Debt | According to a recent Forbes article, private debt has risen to be “the third-largest alternative asset class behind private equity and direct real estate,” and one comprised of “nearly $1 trillion in total assets.” Investing in private debt essentially means serving as a non-bank lending option for small, upstart companies, and then potentially collecting interest when the loan is repaid over time.
- Hedge Funds | Hedge funds are an interesting case for investors. While traditional mutual funds only deal in publicly-traded securities (stocks or bonds, for example), a hedge fund offers greater diversification potential by investing in a wider array of asset types (including things like real estate, commodities futures, or even cryptocurrencies). As such, hedge funds often take an aggressive—yet calculated—approach with the hopes of a big payoff down the line.
- Collectibles | We’ve come a long way since the Beanie Babies craze of the 1990s, which epitomized the idea of collectibles as an investment. Now, people collect things like artwork, trading cards, wine, and even classic cars. The idea behind these investments is to purchase something valuable, keep it in pristine condition, and ultimately “cash in” when their value is the highest (or there’s a pressing need to convert them to cash).
What Are Two Alternative Investment Options Worth Considering for Your Portfolio?
While the five investment classes listed above are often considered a sort of “Big 5,” they don’t tell the entire story. In reality, there are plenty of alternative asset classes that may be worth investing in, even if they don’t get the same amount of attention as the others.
- Life Settlements | Life settlements are an option that many people don’t know about. When policyholders decide they don’t want or need an existing life insurance policy, life settlements offer them a way to stop paying their policy’s premiums by selling that policy to an investor—in exchange for a cash sum. From the investor’s perspective, life settlements may offer a lower-risk investment than some of the other alternative investments discussed above. As a non-correlated asset—an investment that tends to move independently of traditional market fluctuations—life settlements may be less likely to decline in value during market downturns, potentially providing stability in portfolio performance. Life settlement investments are not without risk. You should carefully research the risks surrounding life settlements and discuss with a professional who is well versed in this field to determine if life settlements are a viable option for you.
- Digital Assets | As Deloitte notes, “digital assets” represent an asset type that “has accelerated rapidly” in popularity as more investors have taken them seriously and worked to develop effective strategies for dealing with them as investments. In the context of alternative investments, digital assets include things like cryptocurrencies and non-fungible tokens (NFTs). Crypto assets are largely unregulated and can be a particularly volatile alternative asset. Nonetheless, they are certainly among the most popular alternative assets, but a healthy dose of caution is recommended.
As always, it’s important to consult your financial advisor for advice whenever you are considering any investment moves to assess whether such investments are suitable for you based on your investment goals, risk tolerance, and financial situation.
Build a Stronger, Recession-Ready Portfolio with Alternative Investments
Whether you’re looking to learn more about different alternative investment opportunities or want to talk strategy, it’s best to start by chatting with a trusted financial advisor. The team at i2 Advisors is ready to answer any questions you might have about life settlements as an investment strategy. Reach out today to schedule a conversation.
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