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Beginner’s Guide to Alternative Investments

beginner's guide to alternative investments
Key Points
  • Alternative investments are assets outside of traditional markets, like stocks and equities.
  • They are less liquid than traditional investments, which makes it more difficult to bail when the investment goes south.
  • If you choose to purchase alt assets, use a self-directed retirement plan, like the Self-Directed IRA.

Alternative investments have grown in popularity over the past ten or so years, but it’s true that they aren’t for everyone. Alternative investments are more complex in nature and illiquid when compared to traditional investments, thus are often held by accredited investors whose annual income exceeds $200,000.

This is true of some investments, like hedge funds and private equity funds, which are less accessible to small investors. But not all are limited to accredited investors, or difficult to access as a small investor. In fact, many of our top five alternative investments are popular among investors because they are easier to understand than investments within the stock market.

What are Alternative Investments?

Alternative investments are assets outside of traditional/conventional markets, such as stocks. Some popular alternative investments include real estate, which is often classed as an alt asset; cryptocurrency and private business/placements. Other common investments are:

  • tax liens/tax deeds
  • foreign currencies/options
  • investment funds
  • notes/loans
  • ICOs

Because these investments do not move in the same direction as the traditional markets, they tend to perform better when traditional investments are down. Due to their lack of correlation, it is highly advised to ensure your investment portfolio isn’t lacking in either investment type. This is the number one characteristic of alternative assets that make them a good investment: investment portfolio diversity.

Cons

As with every investment, there are risks and the same applies to alternative investments. Here are some of the most common cons of alternative investments.

Illiquid: Alternative assets are less liquid than their traditional counterparts, meaning it will be more difficult to exit the investment if it moves south. For example, real estate is an illiquid investment because of the difficulty to sell property quickly. Whereas stocks or mutual funds can be sold very quickly, with many investors willing to make the purchase.

Volatile: Some alternative investments are hard to predict, due to their unstable prices. For example, cryptocurrencies such as Bitcoin are considered “volatile” investments. While there is high reward, there is also high risk when making crypto investments. Real estate is another “volatile” investment, as witnessed during the 2008 financial crisis.

But not all alternative investments are considered volatile. Gold is often considered a safe investment, particularly during times of political and economic turmoil. There can be volatility in any investment you purchase, and these days, alternative investments are seen as a buffer against stock market volatility.

Complex: It is often said that alternative investments are more complex. This is true of some assets, but not all. For example, many investors turn to real estate because it is an investment they understand and trust more than stocks and bonds. Whereas hedge funds are more complex because investors employ high-risk methods to generate large gains.

Buying Alternative Investments with IRA Funds

An advantage to using IRA funds to purchase investments is that all income generated is tax-free if you establish a Roth account, or tax-deferred. Your IRA can hold alternative investments, such as real estate and cryptocurrencies, but it must be done with a Self-Directed IRA and through a passive custodian. If you establish a Self-Directed IRA with a bank or financial institution, you will not have the freedom to purchase outside of traditional assets, because these companies only sell traditional investments.

Learn more about choosing a Self-Directed IRA to make alternative investments.

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