Alternative Investments: Expanding Your Portfolio Beyond Traditional Assets
Aaron Cirksena is the founder and CEO of MDRN Capital.
Today’s investors face unique challenges. High inflation is eroding portfolio value, market volatility has made it more difficult than ever to predict returns and manage risk, and interest rates on bonds and savings accounts are historically low, weakening the power of traditional diversification tools.
Faced with these issues, some investors are seeking alternatives to traditional assets to strengthen their position. The following are some that are available today.
Commodities
Commodities, which include raw materials like oil, wheat and livestock, are an alternative asset class that is attractive to investors who appreciate the high gains that result from market volatility. Although they are considered more volatile than traditional investments due to the potential for fluctuations triggered by market shifts, political developments and natural events, they have a low correlation with traditional assets, making them a good alternative for investors seeking to establish diversification.
Commodities also serve as a sound alternative for today’s investors because they offer a potential hedge against inflation. As inflation goes up, commodity prices generally follow.
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Real Estate
Investors have long been drawn to real estate due to its potential for high returns. While it generally falls short of long-term stock market gains, real estate’s risk-adjusted returns outperform traditional markets. Real estate also offers additional earning potential in the form of rental income and the leverage that can be gained by using mortgages to finance purchases.
Real estate helps with diversification by offering investors a hedge against inflation. While rental rates tend to keep pace with inflation, home values typically outpace it. The downside for investors is that high inflation also tends to slow the pace of sales, which means cashing in on high real estate values can be challenging.
Real estate investment trusts (REITs) are an option for investors that have increased in popularity over the past two decades. These trusts, which operate like mutual funds, allow investors to earn income from real estate without purchasing properties themselves by benefitting from dividends and increases in the value of their shares.
Private Equity
Whereas stocks facilitate investment in publicly traded companies, private equity is the vehicle used to invest in private companies. Investors typically access this asset through private equity firms that raise capital from investors. The firms then use the funds to invest in private companies in ways that increase their value.
Private equity offers higher earning potential than traditional assets but also higher risks. Private equity funds are typically focused on a limited number of companies, robbing them of the benefits of diversification. Private companies are also not subject to the disclosure rules of public companies, which means private equity investors have limited information to guide their investment decisions.
Investors looking for long-term options will be most comfortable with private equity. Private equity firms typically focus on building value over time in the companies they invest in, which means investor contributions remain illiquid until the fund term ends.
Annuities
Annuities serve investors primarily focused on securing a predictable income stream for retirement. Through a long-term contract established between the investor and an insurance company, annuities allow investors to pay a premium for a set number of years to secure a guaranteed payout period. While relatively safe, their returns may not keep up with elevated inflation.
Fixed index annuities provide return performance anchored to a market index, lowering the investor’s volatility risk and management fees. They also grant investors principal protection, keeping contributions safe even when markets decline.
Fine Art
Economic recessions can significantly impact the value of traditional assets. As corporate profits decline, stock prices follow, and corporate bonds can suffer the same losses.
Fine art and collectibles are alternative assets that have proven resilient during recessions. Recent studies have shown that the asset class not only performs better than stock markets but also bounces back faster than markets in times of economic uncertainty.
In recent years, art funds have emerged that allow investors to own shares of fine art collected by experts. These funds establish holding companies that invest in art pieces and promote and resell them, with investors benefiting from profits.
Cryptocurrency
The 2024 U.S. presidential election illustrates why some investors looking for high returns have been drawn to cryptocurrency. As an example, on November 6, 2024—the morning following the election—bitcoin jumped nearly 8%, pushing it to a new record value of more than $75,000. Other popular coins saw increases of as much as 17% after election decisions went public.
However, investors must also embrace significant risks to tap into those returns. In its short history, bitcoin has also handed investors significant losses, including a 53% loss over a one-month period in 2022.
Crypto investors also face risks associated with the lack of regulation in the crypto space. While controls are starting to emerge, they are largely untested. Additionally, the rapid pace of innovation in crypto leaves regulators shooting at a moving target. New investors must wade into crypto knowing they are engaging with an asset class whose value can easily be manipulated.
A number of options exist for investors seeking to expand their portfolio beyond traditional assets. Each, however, must be carefully considered through the lens of risk tolerance, time horizons and overall investing goals.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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