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When most people look to invest and grow their money, they often turn to three different investment vehicles, which include savings accounts, bonds, or stocks. But with interest rates at an all-time low, and with more people becoming dissatisfied with the equity market due to rising volatility, some investors have started to seek out alternative investments.

There are now a large variety of alternative investment vehicles that investors can choose from. More and more of these investors are hoping that these alternative investments can help boost their returns and provide a better-diversified portfolio.

If you've found yourself wondering what alternative investments are or how they can benefit you, then you're in the right place. In this article, we'll define what alternative investments are, whether they are suitable for you, the safety of them and some of the most popular alternative investments you can invest in.

What is an alternative investment?

An alternative investment can be classed as a financial asset that falls outside the conventional investment categories such as bonds and stocks. 

Some notable examples of alternative investments include P2P lending, commodities, real estate, hedge funds and cryptocurrency. Alternative investments can even include assets such as fine art and jewelry. 

Most alternative assets that people invest in are usually illiquid, as opposed to conventional investments such as stocks which are liquid. Liquid assets can be converted to cash more quickly, whereas illiquid assets are generally held for the long-term and take longer to sell and convert to cash.

A good example of this is if you were to sell vintage and rare wine, you're likely going to have more difficulty in selling this asset compared to selling 1,000 shares of Amazon. 

Alternative investments are growing in popularity among most investors, but they are still mostly used by institutional investors and high-net-worth individuals.

Why choose an alternative investment?

There's a variety of reasons why you should consider investing in alternative investments. Some of these include:

Diversification

You should never rely on a single investment vehicle. Markets and investments, in general, can be unpredictable, and they are subject to volatility. It's common to see one or even two types of investment suffer during a recession, for example, but you're unlikely to see three or more of your investments experience declines. 

As we've seen during Covid-19 investments such as gold, AI currency trading, and recession-proof stocks in the healthcare and low-cost retailer space have all performed well during this period.  

A well-diversified portfolio that mixes traditional investments with alternative investments can help in mitigating losses. Investing in different types of assets will not only help spread your risk but also increase your odds of investment success. 

Enhance returns

For some people, the returns traditional investments provide are no longer satisfactory. Investors looking for a higher yield of 10% a year, may struggle to achieve that when using traditional investments. Alternative investments can carry a higher risk compared to an index fund, for example. Still, they also tend to offer the opportunity to achieve higher returns, with returns of up to 50% not being unheard of.

A good example of this is cryptocurrency. Although very volatile and unpredictable, and certainly riskier than stocks, for example, it has the potential to make higher returns. Since the inception of Bitcoin, it has consistently earned higher returns than stocks, except in 2018. 

On occasions, Bitcoin's 30-day gains and losses have exceeded 100% on multiple occasions, which highlights just how volatile Bitcoin and cryptocurrencies are in general. However, over the long-term cryptocurrency is likely to produce positive returns if you hold it for life, even if you bought it at an all-time high.

Opens up more passive investing opportunities

When it comes to traditional investments, index funds and bonds are good options for people seeking passive investing opportunities. However, by sticking to only these two passive investing options, you won't build a particularly well-diversified portfolio. Alternative investments can help provide investors with more passive investing opportunities and allow them to diversify further.  

Many investors don't want to have to actively manage an asset or portfolio as it can often be too time-consuming. For investors seeking a well-diversified and passive portfolio, certain alternative investments can be a great solution. Automated AI trading, P2P lending and REITs are three great alternative investments that are entirely passive and don't require any ongoing management from investors. 

Direct Ownership

Even investing in individual stocks such as Amazon or Apple with a large amount of capital, for instance, $1 million. You would still have little equity in the company, and therefore, you would have little control over a company's operations. 

When investing in stocks or even index funds, you're placing your faith in the company's management and decision making, in the hope they successfully manage and grow the company to produce you a return. 

Whereas investing in assets such as fine wine or art, you can have full and direct ownership over those assets. 

This may not be too much of an issue for you, but for investors that want full control and ownership over their investments, assets such as fine art, gold, wine and jewelry can be great alternative investments for you.  

Who should consider alternative investments?

Alternative investments are best suited for high net worth individuals. When you have a large amount of capital, it makes sense to invest in a variety of assets that put your money to work and help you diversify.

However, there are alternative investments which are becoming more accessible to investors with a smaller amount of capital. The decline in interest rates has seen many people move away from savings accounts and left them looking for alternatives. Two notable examples of sectors who are appealing to these smaller retail investors are P2P lending companies and retail forex brokerages.

It's also important to consider which type of alternative investment/s is best suited to you, and the type of return you wish to receive. 

There are two types of alternative investments. These include:

Income-producing investments. These investments will provide you with a cash-on-cash return. Some notable examples include automated trading and P2P lending.

Growth producing investments – These investments will generally appreciate in value and rise in value with the price of inflation, but will not provide a cash return. Assets such as cryptocurrency, gold, fine art and jewelry are some notable examples. 

Whether you're a high net worth investor or an investor with a small amount of capital, alternative investments can be an excellent option for you. It's important to remember, however, that when investing, you'll never find a "100% safe investment" and you should always do research and educate yourself before investing any of your hard-earned cash. 

How safe are alternative investments?

The biggest issue with alternative investments is the lack of regulation. When there is a lack of regulation, investment scams and fraud become more prevalent. Bitcoin is a notable example of an alternative investment that is subject to a high number of scams. It's therefore very important that investors do their due diligence when looking to put money into an alternative investment.

Whether you're investing in ETFs or Cryptocurrency, all investments carry risk, and as we mentioned before, you'll never find an investment which is 100% risk-free. As with any investment, the higher the risk, there is potential for greater reward. You should always do your due diligence and carefully assess whether a particular investment is right for you.

Another difficulty of investing in alternative assets, particularly high-value assets, is how you're going to protect them from theft or damage. When investing in assets such as fine art, not only will you have to consider how you're going to store your asset safely, but you'll also have to consider costs such as insurance and maintenance to maintain the asset. The associated costs of investing in alternative assets can eat away at your returns. 

One final consideration is when it comes to selling the asset, you may have difficulty even valuing the assets, due to a lack of transactions involving them. For example, a seller of a rare stamp or coin may have difficulty determining its value, when there's an extremely limited supply.

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The most popular alternative investment funds

What alternative investment options can you invest in?

Real Estate

Out of all the alternative investment options, the most commonly owned asset is real estate. Why is that? Well, if you own a house, you can not only benefit from the property appreciating in value over time, but there's also the opportunity to earn residual income from renting out the property. When you combine this with the fact that real estate tends to be less volatile than equities and bonds, it's no wonder why it's a popular choice among investors and why 90% of millionaires got their wealth by investing in real estate.

Real Estate Crowdfunding/Real Estate Investment Trusts (REITs)

Although real estate can be a great asset to own, for many, it might not be the best investment for them. Selling or renting real estate can be too time-consuming, especially when dealing with rental tenants and maintenance issues.

Two great alternatives for investors who want to invest in real estate without actually buying any property is real estate crowdfunding and REITs.

Real estate crowdfunding allows people to invest in different commercial real estate projects via a real estate crowdfunding platform. It's perfect for people who want to invest in real estate, but don't want to own or maintain a property.

REITs pool investors' money together to purchase real estate. Rather than investing in the actual property, investors buy a share of the company that owns and manages the rental property. The shareholders are then distributed dividends.

Fine Art

The art market has started to become more popular among investors looking to diversify their portfolio. Art can be a specially good investment if you enjoy art, as it allows you to turn that appreciation into an asset.

You should only start investing in fine art if you have knowledge and experience in the area or are willing to learn more about the industry. Art is also a non-liquid asset, so if you want an asset that you can sell quickly, then fine art may not be for you. If you invest in fine art, it's best that it only makes up a small part of your portfolio.

Peer-To-Peer (P2P) Lending

The art market has started to become more popular among investors looking to diversify their portfolio. Art can be a specially good investment if you enjoy art, as it allows you to turn that appreciation into an asset.

You should only start investing in fine art if you have knowledge and experience in the area or are willing to learn more about the industry. Art is also a non-liquid asset, so if you want an asset that you can sell quickly, then fine art may not be for you. If you invest in fine art, it's best that it only makes up a small part of your portfolio.

Your Own Online Business

It's no longer sensible to rely on a single source of income like a job. In this digital era, it's opened up the opportunity to start an online business, whether as a side hustle or a full-time operation. There are numerous businesses you can start or services you can offer. 

Some popular options include:

Writing an ebook and selling it on Amazon

Creating an online course

Offer freelance services such as copywriting, proofreading, graphic design etc.

Offer teaching services such as teaching English or maths

Commodities

Commodities are raw materials or agricultural products that can be bought and sold. Popular commodities traded metals like gold and copper, and energy products like oil. It's also possible to trade on soft commodities such as corn, wheat, and cattle.

Commodities will hedge against inflation and usually provide you with positive returns. They are often best to own when there are periods of high inflation as demand is higher for commodities during this period.

AI Trading

In the past decade, the rise of artificial intelligence has revolutionised how financial instruments are traded. AI trading solutions use artificial intelligence and algorithms to automate trading activity and can analyse and process vast amounts of data. The most common financial instruments that AI can trade on are stocks and currencies.

Cryptocurrency

Cryptocurrencies are another alternative investment option you can hold. There are many choices when it comes to cryptocurrency, but Bitcoin is the best known. Cryptocurrency is very much an emerging technology which has the potential to become a very profitable investment. However, it's very much a high-risk, high-reward opportunity. Therefore it's not recommended to invest a large amount of your money into cryptocurrencies.

Hedge Funds

A hedge fund company pools investors' money together and uses a variety of investment strategies to try and generate high returns for their investors. With hedge funds, you have experienced professionals managing your investments, and they'll have a good idea of what investments will succeed. 

Hedge funds are similar to mutual funds in regards to them being pooled investment vehicles that are professionally managed. However, hedge funds are private investments that are only available to accredited investors, whereas mutual funds are regulated investment products.

Hedge funds typically use riskier investing strategies to try and achieve higher returns for their investors. In order to participate in a hedge fund, you typically require a minimum investment of $100,000. You'll also have to be prepared to pay a yearly fee for using a hedge fund.

Franchise

Franchises are a good option for people who want to invest in an already proven business model. They work by allowing an investor/party to acquire the rights to use the franchisor's name to sell a product or service. Some famous examples of businesses that use the franchise model are McDonald's, KFC, Taco Bell etc. 

Although owning a franchise can be very lucrative, it's certainly not a passive investment opportunity. Although these businesses are household names, they require an extensive amount of work to run. It's also worth noting that they require a relatively substantial amount of capital to set up. But if you're willing to take on the risk, there is a potential for a significant payoff.

What to do next?

The alternative investments industry is growing, and the ability to invest in various assets is becoming more accessible than ever. But, as a lot of alternative investments are still unregulated, you need to be cautious with different investing opportunities.

As long as you do your research and make sure that what you're investing in is legitimate and meets your risk appetite, then alternative investments can be a great addition to your portfolio. 

Whether you invest in alternative investments or not, you need to make sure that you don't just leave all your hard-earned money lying in a savings account gaining little to no interest. It's always important to invest savings to help build and grow your wealth.

If you're interested in an alternative investment to a savings account that produces a consistent and stable ROI every single month, then you can learn more about our different investment accounts here

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