Investment options like bonds, stocks, and mutual funds often dominate the conversation. However, while these traditional asset classes are essential parts of a balanced portfolio, it’s crucial not to overlook the value that alternative investments can bring.
This blog will explore alternative investments, mainly focusing on real estate, private equity, and more. The objective is to enlighten our Johnson Wealth and Income Management clients about options beyond conventional investment.
Why Consider Alternative Investments?
The primary reason investors turn to alternative investments is diversification. Simply put, alternative investments don’t always match traditional markets. They provide a means of spreading risk across different types of assets, potentially reducing an investment portfolio’s total risk. When financial markets tumble, alternative investments can help cushion the fall and even provide avenues for continued growth. In addition to diversification, there are several other compelling reasons investors consider alternative investments. Let’s explore some of these reasons:
- Potential for Higher Returns: Many alternative assets can generate significant profits over the long term. These investments often involve opportunities not readily available in public markets, allowing investors to tap into unique growth prospects.
- Low Correlation to Traditional Assets: These investments correlate poorly with traditional asset classes. This means their performance may not move in tandem with the broader market. Alternative investments may behave differently, potentially providing a hedge against market fluctuations.
- Access to Unique Opportunities: Alternative investments grant access to exclusive opportunities that are not accessible through regular investment avenues. These could include private equity in startups with high growth potential or participation in private real estate projects. As a result, investors can capitalize on niche markets that offer promising returns.
Let’s take a deeper look at some alternative investments below.
Alternative Investment #1: Real Estate
Real estate is often considered the gateway to alternative investing. It involves buying properties—residential, commercial, industrial, or land—with an expectation that the asset will appreciate over time, generate rental income, or both.
Out of the approximately 50 million rental housing units in the United States, roughly 41% are owned by individual investor landlords, commonly called mom-and-pop landlords. This translates to about 20.5 million rental units these small-scale property owners manage.
Investing directly in property can be capital-intensive, but the advent of real estate investment trusts (REITs) has democratized access to this asset class. REITs own and, in most cases, operate income-producing real estate and are required to distribute at least 90% of their taxable income to shareholders annually in the form of dividends.
In addition, real estate crowdfunding platforms have allowed investors to pool resources to buy into real estate opportunities that were previously inaccessible due to high capital requirements.
Alternative Investment #2: Private Equity
Private equity (PE) is an alternative investment involving capital not listed publicly. This form of investment consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies. This resulted in a delisting of public equity.
Private equity investment comes from institutional and accredited investors. These investors can dedicate substantial sums for extended periods. This type of investment can generate significant returns but carries higher risk and lower liquidity than traditional asset classes.
Private equity funds are typically active investors – they don’t just buy companies but also attempt to improve their value through operational improvements or financial engineering. As such, the value and ultimate success of private equity investment primarily depend on the fund manager’s ability to improve the profitability of the underlying companies.
Alternative Investment #3: Hedge Funds
Hedge funds are pooled investments that use different strategies to earn active returns for their investors. These strategies may include leverage, long, short, and derivative positions in domestic and international markets to generate high returns. While they may appear similar to mutual funds, hedge funds differ. They face less regulation, adopt more complex strategies, and often seek to profit in all markets, bull or bear.
However, the complex nature and level of risk associated with hedge funds mean they’re typically reserved for sophisticated investors. Before investing in hedge funds, one must thoroughly understand the risks and consider whether they suit their personal investment goals.
Other Alternative Investments
Other alternative investments that can enhance portfolio diversification include commodities, venture capital, and digital assets such as cryptocurrencies.
- Commodities include physical assets like gold, oil, agricultural products, etc. Their prices can be influenced by changes in supply and demand, making them a valuable hedge against inflation and market volatility.
- Venture capital involves investing in startups with perceived long-term growth potential. While the risks are high, successful investments can yield substantial returns.
- Cryptocurrencies have gained substantial attention in recent years as a potential alternative investment. These digital assets have shown the capacity for high returns but come with significant volatility and regulatory uncertainty.
By incorporating these alternative investments, investors can create diversified portfolios while mitigating risks and capitalizing on potential opportunities. However, it’s essential to approach each alternative with thorough research and a clear understanding of their unique risks and rewards. Working with a financial advisor with experience in alternative investments can be very beneficial.
Working With A Financial Advisor
If you are looking for a financial advisor with local Iowa and global financial knowledge, Johnson Wealth and Income Management can help. Our financial advisors offer personalized guidance tailored to one’s specific goals and circumstances, helping to create a comprehensive financial plan.
We also provide insights on investments, retirement planning, tax strategies, risk management, and more. At Johnson Wealth and Income Management, our team can help you stay on track and adapt your financial plans as life circumstances change. With professional experience and a focus on our client’s best interests, our advisors can provide peace of mind and empower individuals like you to achieve their financial aspirations.
Alternative investments offer diverse ways to broaden your investment portfolio, manage risks, and potentially enhance returns. However, they also carry their own sets of risks and challenges. As such, it’s vital to undertake thorough research and seek advice from financial advisors like us at Johnson Wealth and Income Management. Ensuring that alternative investments align with your overall investment strategy, risk tolerance, and financial goals is crucial.
Johnson Wealth and Income Management is committed to helping you navigate the intricate investing landscape, ensuring your financial plan is robust, balanced, and primed for growth. Whether you’re interested in exploring real estate, private equity, or other alternative investment options, our advisors guide you every step of the way.
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