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Exploring Alternative Investments

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Brooke Joly Article August 12th

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For most of my adult life, I found the scope of potential financial investments to be rather narrow. When I had money to invest, I felt my only options were to:

  • Invest in retirement accounts, either provided by my employer or independently
  • Save cash in a high-yield savings account
  • Set aside money in ETFs or individual company stock in a brokerage account

That about sums it up. Like I said, pretty narrow. But as I dug more into the concept of portfolio diversification, I realized there are other classes of investments outside of these that I wasn’t considering. Those asset classes are referred to in the industry as alternative investments.

What are alternative investments?

Alternative investments are non-traditional classes of investments that fall outside the scope of equities and cash. Real estate, cryptocurrency, and fine wines would all fall into the category of alternative investments.

Start-up companies are cropping up in every industry, so I shouldn’t be surprised to find so many in the alternative financial investing space. Not only are companies like Robinhood and Acorns making it easier to invest, but other start-ups are seeking to bring investments that were once reserved for the wealthy, like art or real estate, to the masses.

Why would someone consider an alternative investment?

There are plenty of reasons why everyday investors have begun to look outside of the mainstream investment options.

  • Companies are making these investments accessible – What companies like Robinhood and Acorns have done for equity investments, AcreTrader, MasterWorks, and Fundrise are doing for alternative investments. These start-ups disrupt industries like art and farmland that have been untouched for so long by the average investor. And when we can invest from our phones through easy to use apps, you better believe people will test the waters.
  • Everyone wants to make “easy” money – Let us reflect for a moment how everyone became a bitcoin investor in late 2017 when it started going gangbusters. When something gets noticed as a new way to generate passive income, people jump on it with little or no understanding of how it works. With the recent accessibility of alternative investments, people will likely seize the opportunity to make what seems like quick money. New investors should be careful, though, as many of these investments should be viewed through a longer-term time horizon of at least three to five years.
  • They’re new and different – Alternative investments have a certain mystique and allure to them, especially in their infancy, that makes them incredibly appealing. Of course, everyone wants to be the first one at the party to know about the next big thing. Once these alternative investments become more mainstream, they’ll become just another ETF. For now, though, they’re the latest shiny object, and everyone wants a piece.

What types of alternative investments are there?

To understand how I can further diversify, I decided to take a look at a few of the non-traditional options available. Some of the most attractive alternative investments, in my opinion, include investing in high-dollar art, farmland, and real estate (without owning property – similar to, but different than a REIT). Keep in mind there are plenty of other alternative investments out there, ranging from gold to wine. In this brave new world, it’s all just a click away.

Art

I first heard about investments in art on a personal finance podcast when they mentioned Masterworks. Masterworks is a company that allows its members to purchase shares of a single piece of art, which will then hopefully raise in value over time until the painting is sold. Meaning that not only do you not have to deal with the maintenance of fine art, but you also don’t even really need to have an art appreciation. (Although it might be a good background to have to enable you to choose the right pieces to invest in.)

What intrigues me about art is that it’s an asset class that’s typically untouchable unless you have the money to buy a single piece, ranging from thousands to hundreds of thousands of dollars. Masterworks allows investors to buy-in for only $1,000. I was also skeptical that art could deliver returns the way the stock market might. But according to Masterworks, returns average between 9% and 15%.

You can search by artist to view historical returns here.

Farmland

Investments in land are always tricky, but with farmland, the investment is more like a rental. Farmers pay to rent and utilize the property on which they produce their crops. I have to admit this investment made me a bit wary until I looked into it a little further.

Companies like AcreTrader are making farmland investments accessible to people who may not want to deal directly with the farmers. It’s set up as a passive investment, much like rental income from purchasing, then renting out a property. The price point for this investment class is also comparable to the down payment on a rental, with most investments from $15,000-$25,000. Acretrader’s website boasts an impressive 11.5% average annual return on farmland, which is slightly above the S&P 500 average. 

You can find more information on Acretrader’s historical returns here.

Real Estate

Real estate is an investment class with fairly high barriers to entry. If you genuinely want to become a real estate investor, you’ll need to have enough capital to buy properties and pay for renovations, repairs, and management of said properties.

Companies like Fundrise are making it simple to own a fraction of a real estate investment. And they let you in on the real estate game for only $500. They also indicate average annual returns of around 9%, which is pretty significant.

You can find more information on Fundrise’s historical returns here.

It seems like companies are popping up every day to bring investments to the mainstream that were previously only accessible to the elite. While I’m tempted to jump into some of these alternative investments, I have to admit I’ll probably wait until I’ve maxed out all of my traditional retirement vehicles for the year to do so. Not that I don’t trust my farmland will make big returns, but I think it’s best to keep these alternative investments to a minimum until they’ve had more time to mature.

Contributor’s opinions are their own. Always do your own due diligence before investing.

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