When Should You Invest in Alternative Assets?

Typically, when people are new to investing, they’ll begin with traditional markets such as stocks or bonds. Then, when they begin realizing profits, they’ll seek to diversify their portfolio to include other kinds of investments such as art or real estate. But when should you invest in alternative assets, and what types are there? Keep reading for those answers and more.

What are Traditional Investments?

Let’s start there. In general, traditional investments include stocks, bonds, and cash or cash equivalents. The latter includes assets such as bank certificates of deposit or money market accounts that can easily convert to cash.

What are Alternative Investments?

Essentially, alternative investments are assets other than those just mentioned. Examples include art, real estate, private equity funds, commodities, and even antiques and wine.

Are More People Going the Alternative Route?

That is the trend, and it’s true globally.  According to the firm Prequin, the volume of capital invested in alternatives now totals more than $10 trillion. Why? A major reason is that such investments are not tied to stock market fluctuations. They also provide a hedge of protection against inflation – particularly relevant right now in the U.S. – and may help investors achieve greater long-term risk-adjusted returns. In addition, many investors are choosing such investments to diversify their portfolio while generating passive, secondary income. Art investment is a good example.

What are Key Differences Between Traditional and Alternative Investments?

There are a few factors to consider when it comes to traditional versus alternative investments, and those relate to liquidity, stability, and accessibility.

  • Liquidity. For the most part, stocks, bonds, and certificates of deposit can be bought and sold swiftly and easily, whether you go through an online broker or by phoning an investment advisor. On the other hand, alternative assets are not as liquid and generally take longer to buy and unload. More on that below.
  • Stability. While alternative investments are not as liquid, their prices are generally more stable. Stock values, on the other hand, are constantly changing.
  • Accessibility. It’s easy to invest in traditional markets. Conversely, with alternative investments, you often must go through certain channels. However, alternative investment platforms such as Yieldstreet are making such investments easier and more accessible.

What are Some of the Benefits and Shortfalls of Investing in Alternatives?

There are pros and cons to most anything. One drawback to alternatives has been that many require a relatively higher minimum investment dole out. While that may be generally true for private investment funds – where the potential for lucrative rewards also exists – that’s no longer necessarily true for asset classes such as art, which can be purchased fractionally.

As far as benefits, we’ve mentioned that less liquidity often translates to more pricing stability. That lack of volatility is chiefly what is luring investors to such assets, particularly during this time of economic and business disruption.

Also, investment in alternative classes means direct ownership of the asset, be it real estate, art, or another entity. Moreover, there’s that protection against inflation that we discussed, as well as potential tax benefits including long-term gains treatment for real estate investors.

When is a Good Time to Invest in Alternative Assets?

Well, if you do so now, you’ll be on trend since such investments are more popular than ever. Or perhaps you wish to wait until you feel the need to diversify. Your timing may also depend on factors such as the economy or other market forces, including inflation.