Today I’m going to share with you what I believe are the top alternative investments…
Including my absolute favorite: early-stage startup investing.
FACT –– Kevin O’Leary and I BOTH invested in the same Startup this year.
And the details to invest in that very Startup are on the Angel Investing Insider dashboard (read: you can invest with us).
Now when it comes to diversification through alternative asset classes, investors have more options today than ever before.
And they have a low correlation with standard asset classes like stocks and bonds, making them an excellent counterweight to more traditional investments.
But sometimes they can be riskier, have limited if any regulation, and have smaller markets of interested buyers.
So how do they stack up against each other?
How Do They Stack Up?
Investments that don’t fall into one of the traditional categories like stocks, bonds, or cash are considered “alternative”.
Alternative investments encompass a variety of assets but they all share some similarities. They tend to be illiquid, unregulated, and risky, but also yield high returns and counterweigh traditional investments.
Examples include financial assets like private equity (angel investments), hedge funds, commodities, and cryptocurrency, as well as tangible assets like art, wine, coins, and precious metals.
And while my absolute favorite alternative investment is angel investing (I developed an entire service around it), I think theirs value in understanding your options.
Why Make Alternative Investments
Investors make these kinds of investments for one reason — diversification.
Because they have a low correlation with standard asset classes like stocks, these are an excellent counterweight. While stocks and bonds are hurting, alternative assets may be doing just fine.
Some alternative investments like gold, antiques, or oil provide a hedge against inflation, retaining their value far better than cash.
Alternative Investment Risks
These investment vehicles are usually riskier than stocks and bonds.
Compared to something like stocks, alternative investments have less legal oversight and regulation. While they are subject to examination by the Securities and Exchange Commission (SEC) they don’t have to register with them (with the exception of startup investments).
Being risky investments, they are also rewarding. The stability, predictability, and history behind bonds make them very safe, but they provide low returns. Alternative investments tend to be volatile and thus provide higher returns.
While stocks may be easy to sell — there is a large market ready to buy your stocks — something like a collectible baseball card or apartment building is much harder to sell. There may be only a small market interested in buying your alternative investments. This can make them difficult to value and difficult to liquidate.
Seed investing (angel investing) is an alternative investment and has the highest average returns of any asset class. This makes it ideal for wealth creation rather than just wealth preservation. Investors who can navigate the risks of such investments can make much higher profits than traditional investments.
Here is a general overview of the pros and cons of alternative investments:
|Counterweight to traditional assets||Difficult to value|
|Great for diversification||Illiquid|
|Hedge against inflation||Unregulated|
Most of you are already familiar with angel investing. Investing in private, pre-IPO companies is a highly lucrative form of alternative investment.
The profitability of startups remains even in tough economic times — some of the most successful startups were actually created during or immediately after economic downturns.
Angel investments dodge some of the pitfalls of other alternative investments. Investing in art or real estate has a tall barrier to entry — you will need to make a large initial investment. Investing in startups, on the other hand, can be done for as little as $100.
Also, most angel investments are regulated by the SEC. Investing through Regulation Crowdfunding platforms brings a level of security as all startups are registered and regulated.
Real estate is one of the most common types of alternative investments. It has even become a huge part of popular culture — Monopoly anyone?
When people think of real estate, they usually think of an ultra-rich investor. And while there are some forms of real estate investing that normal investors can get into, for the most part, it’s rather exclusive.
Investors often buy rental properties, becoming landlords to do so. They make money through rent payments or appreciation of the property with the hopes of selling it.
Other real estate investors “flip” properties by buying them, fixing them up with renovations, and reselling for a profit.
Art, Antiques, Collectables
Tangible assets like art are quite profitable alternative investments. The only issue with these is that it takes a great deal of specialized knowledge to be successful investing in them.
Most investors who deal in art, antiques, or collectibles are experts in their niche.
If you have a significant amount of money to begin investing, are an expert, and have a passion for your niche, you can make good returns here.
In 2018, art was the top-performing asset class, beating out real estate, gold, and the S&P 500.
With peer-to-peer lending, investors loan money to borrowers over an online platform in the hopes of turning a profit from their interest payments.
Borrowers either can’t get a loan from a bank or don’t want to, so they go P2P. Often, peer-to-peer platforms are desirable with competitive interest rates, less paperwork, and short approval times.
For investors, initial investment varies by site but can be as low as $25. You can pay for a part of someone’s loan or fund the whole thing. Loans usually have terms of two to five years.
All in all, peer-to-peer lending is an interesting option for investors looking to get higher yields than savings accounts or CDs with a low investment minimum.
Real Estate Crowdfunding
Real estate crowdfunding is like traditional real estate investing without the high price or responsibility that comes with it.
Just like with equity investing, you buy a share and become a part-owner, only with property instead of a company. From there, you can earn profits from rental payments or the sale of the property.
With somewhat low investment minimums — usually around $5,000 — real estate crowdfunding offers a low-risk way to get into the real estate game.
Lastly, we have cryptocurrency. This is a new, niche kind of investment opportunity.
Digital currency is distributed and tracked using blockchain technology. Usually decentralized, these networks work using a ledger that is maintained across the personal computers in the network. Usually, the product is a “coin” that investors can purchase with the hopes that it will appreciate over time.
While cryptocurrency investing may be trendy, it’s still underdeveloped and extremely risky. This type of investment is unregulated, unpredictable, and generally undesirable to investors.
While some people have certainly made millions on cryptocurrencies, investing in them requires extensive domain knowledge and a keen eye for scams — as the space is rife with them.
Alternative Investments in Your Portfolio
As you can see, alternative investing is a mixed bag.
You can find incredible return potential, diversify your portfolio, and counterweight your traditional investments, but they are less predictable and riskier than their traditional counterparts.
Of all of the alternative investments out there, private equity (angel investing) is my top choice. The minimum investment is low, it’s regulated, and best of all, startups persevere through the worst economic times.
To top it all off, there are incredible angel investing resources out there. One of the main issues with alternative investments is a lack of information, education, and historical data.
Angel investing has a long-running history. The return-potential and recession-resistance are undeniable.
To bring more people into this space, StartupCamp is educating new angel investors. We give you the best practices, the best opportunities, and the cutting-edge stories from inside the startup world.
We work with you to diversify your portfolio using the highest-returning asset class there is.