According to PwC, alternative asset classes are projected to reach $21.1 trillion by 2025. Alternative investments, like real estate, private equity, art and private credit, can strengthen your portfolio by diversifying beyond traditional stocks and bonds.
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However, certain restrictions surrounding alternative investments may mean they’re not worth it for everyone, since purchasing a collectible or vintage bottle of wine differs drastically from buying shares of stocks.
What Are Alternative Investments?
According to the Harvard Business School, alternative investments, or alternative assets, aren’t simply sold or converted into cash. For example, while you could quickly sell shares of a company on the stock market, you couldn’t liquidate your home or art collection as easily. The seven types of alternate investments highlighted in the article are:
- Private equity: This broad investment covers anything related to investing in a private company that you can’t purchase shares in on the stock market.
- Private debt: These are the investments that a traditional bank doesn’t finance.
- Hedge funds: These exclusive investments are usually only available to those with a higher net worth.
- Real estate: A common alternative investment, real estate investments include residential and commercial properties, as well as land.
- Commodities: These are typically natural resources like oil, natural gas and precious metals.
- Collectibles: Assets like baseball cards, vintage wines, art and stamps fall under this category.
- Structured products: These assets usually pay out to investors in the form of dividend payments, or they could be assets whose value is derived from another asset.
Brian Chasin, investing expert and chief financial officer of SOBA New Jersey, also listed real estate, private equity, commodities and venture capital as common alternative investments.
Alternative investments can vary in complexity — you could invest in trading cards or find yourself working through complicated business deals.
“Cryptocurrency and digital assets attract attention for potentially high returns, but extreme volatility and regulatory uncertainty make them speculative,” said Abid Salahi, co-founder and CEO of FinlyWealth.
These alternative investments will also have different standards for buying and selling, as you won’t be able to simply list your asset on a marketplace in many cases. However, despite their complexity, they can be lucrative — but how do you know whether they’re worth the effort?
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Alternative Investments Aren’t Tied to the Stock Market
When the stock market swings up or down, alternative investments are unlikely to do the same.
“There’s a low correlation between these types of investments in relation to traditional stocks and bonds,” said Sundip Patel, the co-founder and CEO at AVANA Companies.
If you’re stressed out with the market swings, you could invest in assets like art or real estate.
Alternative Investments Could Have Higher Returns
“Alternative investments are becoming increasingly popular due to their potential for higher returns and a more active investment approach compared to traditional options like ETFs or stocks,” said Alex Blackwood, CEO and co-founder of mogul Club.
According to Vinovest, contemporary art outperformed the S&P 500 from 1995 to 2000 with an annual return of 14%. The Washington Post shared that real estate prices shot up 54% from 2019 to 2024. If you understand the asset class, you could earn higher returns by investing this way over the traditional approach of allocating funds to publicly traded companies.
Salahi noted that rental real estate remains one of the most accessible alternative investments. He added, “The tangible nature of property combined with potential rental income and tax benefits makes it appealing, though it requires significant capital and active management.”
If you have the time and resources to manage an asset class like real estate, you could profit through monthly returns through rent payments and capital appreciation when you eventually sell the home. You could earn far higher returns than in traditional investment models.
There Are Different Levels of Risk
“Private equity and venture capital can provide access to high-growth situations, which come with similar risks but potentially greater rewards, while real estate might be a less risky, income-producing asset class that appreciates over time,” Chasin said.
It’s crucial to point out that alternative assets are a broad category with varying levels of risk involved. For example, purchasing a home to rent out a portion of it could be less risky than investing in digital assets.
Some Alternative Investments Require a Deep Market Understanding
“While alternatives may offer higher returns, they typically involve more complexity and less liquidity,” Patel said.
Before you decide on an alternative asset to invest in, you’ll want to conduct thorough research to know what you’re getting involved in.
“Collectibles, from art to wine to trading cards, can be appreciated significantly but require deep market knowledge and proper storage,” said Salahi. “Their value can be unpredictable, and selling them can take time.”
The objective is to match your alternative investments to your goals, risk tolerance level and investment timeline. Consider starting with a small investment until you gain a better understanding of the market.
Chasin said, “Alternatives can be a viable addition to many investors’ portfolios, but they should always be used in conjunction with research and ideally with guidance from a financial professional.”
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This article originally appeared on GOBankingRates.com: Are Alternative Investments Worth It? Here’s What Experts Say
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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