Consider reasons to seek alternative investments today.
Diversifying into alternative investments can help investors address some of the risks in the stock and bond markets today, including elevated inflation and lower yield due to a low-interest-rate environment. Alternative assets, or nontraditional investments, go beyond stocks and bonds. They may include real estate, physical commodities, private debt and private equity. Although alternatives come with their own risks — such as illiquidity, less regulation and, in some cases, higher entry costs — the risk-return trade-off can be worth it. While some alternative assets are more accessible than others, today’s investing landscape provides opportunities to invest in the private markets, or nonpublicly traded assets. Here are seven alternative investment ideas to consider.
Gold
In today’s economic climate, where investors are worried about elevated inflation, you may consider allocating a portion of your portfolio to gold. This asset class is historically known as an inflation hedge, and gold investors may be able to protect their purchasing power since the precious metal tends to return more than the rate of inflation over time. There are many ways to invest in gold, including investing in gold-mining stocks such as Barrick Gold Corp. (ticker: GOLD), Sibanye Stillwater Ltd. (SBSW) and Newmont Corp. (NEM), or gold exchange-traded funds, including SPDR Gold Shares (GLD) or iShares Gold Trust (IAU). You can also invest in physical gold coins or bullion. Gold has low barrier of entry, meaning there is no minimum requirement to start investing in the precious metal. Unlike other alternative investments such as real estate, gold is a liquid investment, meaning it’s easy to buy and sell. You can easily move in and out of gold investments since investors can access it in the public market.
Cryptocurrencies
Cryptocurrencies make up a growing market that has a broad appeal to individual investors. The crypto markets can be easily accessed by almost any investor through cryptocurrency exchanges such as Coinbase, Binance and Gemini. Over the past several years, digital currencies have shown little to no correlation with traditional assets, which makes them a suitable alternative investment to achieve diversification, depending on your risk tolerance. Of the different cryptocurrencies on the market, Bitcoin has the longest track record and best brand. As cryptocurrencies like Bitcoin gain widespread popularity, the case for adoption and utility is growing stronger. Bitcoin is also seen as a kind of digital gold, holding a similar type of value to the precious metal. In addition, the blockchain technology that powers cryptocurrency is viewed as the technology of the future that can help innovate and streamline business operations and processes. Crypto and its accompanying technology is a promising area in alternative investments.
Real estate
Real estate is a traditional alternative asset that’s often allocated alongside stocks and bonds in an investment portfolio. These investments — such as residential homes, commercial properties or real estate investment trusts — are common forms of alternative investments. Real estate is considered a hedge against inflation because as consumer prices rise, the value of real estate increases. As a result of the pandemic, the housing market across the world has been experiencing a shortage of residential homes for sale while there is high demand among homebuyers. This has resulted in an increase of the value of homes, a positive for investors who are allocated toward this real asset.
Commodities
In a market environment where there is volatility, investing in commodities can be used in a strategy to manage market risk because they’re considered an asset class that has low correlation with stocks. Furthermore, commodities are a traditional hedge against inflation. As the price of goods and services in an economy increases, commodity prices follow. Commodities are an asset that is accessible to almost all investors, unlike some other alternative investments that may require accreditation. You can easily trade gold, agriculture, energy securities and other commodities on public exchanges, usually in the futures market. Investors can also get exposure to commodities markets through an exchange-traded fund like First Trust Global Tactical Commodity Strategy Fund (FTGC).
SPACs
Special-purpose acquisition companies, or blank-check shell companies, are created specifically to raise capital through an initial public offering and buy a company. When investing in a SPAC, you want to have full faith in the leadership team because they are the ones who are finding the investment opportunity on your behalf. SPACs provide investors with the opportunity to access investments in the private market, which historically has been reserved for institutional or accredited investors. While individual investors can invest in SPACs, they can do so only when they’re available in the public markets. As more market participants seek ways to increase returns, the demand for alternative investments such as SPACs could increase. That’s because when investors get in on an investment that eventually goes public at the ground level, the return can be much higher than the returns investors normally see in the public market.
Private debt
Another alternative investment is private debt, sometimes referred to as private credit. Private debt is debt that is held or offered to privately held companies — and some investors may want to gain access to it. These offerings tend to have little correlation to public markets. Investors should be aware of the risk-return profile of the private debt markets. Because private debt is an illiquid investment, you can’t easily flow in and out of the transaction. However, this unique risk tends to come with more attractive investment returns, higher than those of the public market. Private debt investments include direct lending, distressed debt and mezzanine lending.
Direct lending
Direct lending is a type of private debt. Direct lenders include nonbank entities that provide capital to companies in the form of a loan. These firms tend to lend out capital for the short term that provides debt to investors in this area of the private market. Since these transactions are done outside the public market, direct lending has little correlation to traditional investments, which allows for portfolio diversification. For investors who qualify and are comfortable with taking on more risk and are seeking more yield, this subset of private debt could be a suitable investment option.
Seven alternative investment ideas:
— Gold.
— Cryptocurrencies.
— Real estate.
— Commodities.
— SPACs.
— Private debt.
— Direct lending.
More from U.S. News
7 of the Best Growth Stocks to Buy Now
7 Investing Tips From Cathie Wood
7 Safe Stocks to Buy With High Quality Ratings
7 Alternative Investments That Might Fit Your Portfolio originally appeared on usnews.com
Update 11/02/21: This story was published at an earlier date and has been updated with new information.
