Investing should never be limited to the buying and selling of stocks, bonds, mutual funds and exchange-traded funds, or ETFs. To achieve genuine diversification, investors cannot ignore the fast-rising alternative investment sector.
Investors in alternatives deploy trillions of dollars globally, and in the decade ahead, alternatives are poised to take center stage in capital markets thanks to their appeal to sovereign and public pension funds. After analyzing global trends impacting the industry, I believe these five alternative investments are likely to perform particularly well in the coming years amid growing recession talk and high geopolitical tensions. But first, what are alternatives?
A Look At Alternatives
Broadly speaking, alternative investment assets encompass all investments outside the traditional classes of stocks, bonds and cash. Therefore, everything from luxury items, such as wine and fine art, to precious metals, private equity, commodities and real estate falls under the banner of alternatives.
Alternatives are legitimate investment vehicles that can pad your portfolio by adding true diversification. Their primary benefit is in redistributing risk, such that your returns aren’t correlated to stock market performance. Instead, alternatives provide a buffer against economic uncertainty and declines in the stock and bond market.
Alternatives operate much the same way as traditional stocks and bonds. The key to successfully investing in alternative assets is to start small and diversify across a wide variety of asset classes such that your returns are maximized and risk isn’t over-exposed to price volatility.
1. Precious Metals
Precious metals, such as gold and silver, have a lot going for them. They are tangible hedges against inflation, are highly liquid and store value safely over time. As “rescue assets,” precious metals can bail out your portfolio in times of economic downturn. With market sentiment uncertain and wide speculation of a looming recession in the year ahead, gold and silver are exceptional hedges against stock sell-offs. However, it’s important to note fees if you go the route of gold ETFs or mining stocks. To save on fees, investors can gain exposure to gold through direct physical purchasing.
2. Equity Crowdfunding
Just as owning a business can be considered an “alternative” investment, so too is owning a slice of someone else’s business. Today, a growing number of startups and fledgling businesses are selling shares of their company on crowdfunding platforms, such as AngelList and SeedInvest. And unlike Kickstarter, investing in seed-stage startups via equity crowdfunding platforms allows you to own a small part of the company.
Investing in equity crowdfunding presents a considerable degree of risk. In the event that the company flounders, so does your share in the firm. However, a company’s financial success can result in considerable gains for early-stage crowdfunding investors.
Speculation of stock market downturn and an impending global recession puts cryptocurrencies among the best alternative investments. Digital currencies are excellent stores of value that are untethered to stock performance and top indices like the Dow Jones or S&P 500.
If you see through the media frenzy and sensational headlines, you might have noticed that the regulatory environment for cryptocurrencies is maturing on a global scale. As the trading infrastructure improves, regulations standardize, and institutional and retail players drive adoption, I expect cryptocurrencies will perform well throughout the early 2020s.
4. Real Estate
Physical real estate remains one of the world’s leading millionaire-makers. Investing in real estate requires patience, skill and a little bit of luck, but it is a relatively safe investment vehicle that performs relatively well during all stages of the economic cycle. Major housing market corrections are comparatively rare, with only 7% of real estate market dips causing a decline in real prices of 20% or more.
5. Tax Liens
During recessions, many property owners default on their mortgage and fail to pay property taxes. To recoup their losses, many municipal governments sell tax liens at auction, which grants the right to collect the tax amount owed by the property owner plus interest. Buying tax liens can allow investors to collect recurring income from their property or potentially even own the home in the event of a foreclosure for a small fraction of its market cost.
What’s Driving The Alternatives Market?
The 2020s will see radical changes in the asset management landscape. PwC market analysts attribute alternatives’ rising tide to three major catalysts: the shift to individual retirement plans, the emergence of new sovereign investors and the increase in high-net-worth individuals from emerging markets. Consequently, the alternative asset market is forecast to reach as high as $15 trillion by the end of this year. For investors looking to capitalize on this burgeoning industry, alternative assets such as precious metals, cryptocurrencies, real estate, equity crowdfunding and tax liens could be good places to start.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.