What To Consider When Investing In Alternative Assets

Cofounder/CEO of Arrived, the first SEC-approved startup for accredited and non-accredited investors to buy shares in single-family rentals.

More and more venture funds and investment banks are flocking to alternative investment opportunities. These market-moving institutional investors are normalizing assets that were previously seen as niche, highly speculative and risky. What does this mean for those alternative investments and the casual investor?

Most Americans have built wealth through the appreciation of their home and by maintaining a portfolio of stocks and bonds. Aside from these traditional investments, all but the wealthiest of people have been precluded from investing in lucrative alternatives by high barriers to entry and excessive minimum investment requirements. This has exacerbated the ever-widening wealth gap

However, recent regulatory and technological innovations have empowered novice and experienced investors alike to easily enter the worlds of real estate, fine art and more. At this turning point, both big- and small-dollar investors should educate themselves to engage with alternative investment options in order to experience the long-term gains as they appreciate.

A major reason to explore alternative investments is for the recent track record of success. The returns are remarkable. In the past decade, Bitcoin became the best-performing asset. According to research from the Chartered Alternative Investment Analyst Association, the annual appreciation rate for contemporary art increased 14%. Gold, by comparison, has remained stagnant over the past decade with a -0.21% return.

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Protect Your Portfolio

Guarding your portfolio against inflation and stock market fluctuations is another compelling reason to diversify with ownership of art, real estate and other investments. As the U.S. faces the most intense period of inflation in recent history, now might be a good time to take action. 

As inflation cyclically changes, investing in assets like real estate can protect your returns. It is also easier to diversify than established asset classes because you can invest confidently in a variety of items knowing that these alternative investments have a low correlation to traditional equity markets.

Not only can it be easier to diversify with alternative investments, but for many people, they are finding it also has the added benefit of being a more exciting option. You can have whole or partial ownership in something tangible like a home or piece of art that provides an emotional sense of familiarity. This sense of comfort is derived from an investor’s preexisting knowledge of the industry, the main players and the asset itself when compared to an abstract understanding of more traditional assets like a brokerage or retirement account.

As Always, Prudence Is Key

An important caveat is the valid concerns around the volatility of alternative investments. For both seasoned investors as well as newcomers to the game, it is crucial to keep an eye out for the potential pitfalls of investing in alternative asset classes. While there is an ease in investing in something you are passionate about or more familiar with (e.g., homes or paintings), things can get confusing quickly as investors tread into uncharted territories. 

There could also be longer lock-up periods or windows of time when investors are not allowed to redeem or sell shares of a particular investment. This is often because companies and new trading platforms operating in these alternative investment markets want to demonstrate the integrity and stability of the investing process to regulatory bodies.

Other differences from traditional investments include unique legal and tax considerations as well as relatively low press regulation and transparency. These two differences are due to the fact that alternative investments are relatively unprecedented assets that are gaining new attention from a growing audience.

For some investors, these factors could deter them from exploring these assets. However, I believe the potential gains could be worth the necessary time prospective investors need to educate themselves on the potential risks and rewards to invest responsibly.

When New Becomes Normal

Bottom line: Start reading and learning. Investors who are just exploring these alternative options should research what makes sense for their portfolio long term. Holding off on taking the next step toward becoming an alternative investment owner could risk leaving a lot of potential value on the table. Those who are just starting their investing journey have a lot to gain in particular.

The innovation in investment tools is opening the doors for aspiring investors from all socioeconomic backgrounds to get their fair share of the incredible wealth-building potential of these previously niche asset classes. The opportunity to generate social good and high return on investment outcomes paints a very promising future for alternative investments.

The information provided here is not investment or financial advice. You should consult with a licensed professional for advice concerning your specific situation.


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