November 05, 2020

Why You Should Diversify Into Alternative Investments

When the topic of investing comes up, most people think about stocks and bonds. This is because these are the most common investments that people make and are familiar with.

However, there are actually countless different assets that you could potentially put your money to work with.

In the past, investment selection was more limited based on accessibility. You typically had to be involved in a hedge fund in order to have exposure to alternative investments.

Most hedge funds require a minimum investment of $1,000,000. As a result, most people just settled for stocks and bonds.

Today, thanks to technology and innovation, numerous platforms allow you to invest in less common assets with ease. This realm of investing is often referred to as “alternative investments.”

I will be explaining what exactly these alternative investments are and why you may want to consider adding them to your investment portfolio.

What Are Alternative Investments?

The textbook definition is that an alternative investment is a financial asset that does not fall into the conventional category of stocks, bonds or cash. These investments are not traded on major exchanges like the NASDAQ or NYSE.

Since the definition of alternative investments is quite broad, there are many assets that could fall into this category. A few examples are farmland, artwork, structured settlements, fine wine and even film production.

In the past, these alternative investments were reserved for hedge fund investors, institutional investors and high net worth investors with connections.

Now, it is far more accessible. Online platforms offer an array of alternative investments with reasonable minimums.

By raising money from thousands of investors instead of just a smaller group, it makes this investment far more accessible. Instead of requiring $1,000,000 to invest, it could be as little as $10,000 or less per individual.

Why You Should Invest In Alternative Assets?

There are two main reasons why investors seek out alternative investments.

The first reason is diversification.

We have all heard the saying “don’t put all your eggs in one basket.” Instead, you may want to spread your money out across different assets that respond differently to the same event.

That is why most financial experts recommend spreading your money out across stocks, bonds, real estate and even alternative assets.

The more diversified your portfolio is, the better it may be able to weather a storm.

The second reason is seeking sound returns.

We are currently seeing record participation in the stock market thanks to a new wave of commission free trading apps. This has allowed millions of smaller investors to put forth small amounts of money into shares of their favorite companies.

While it is great to see more people investing, this has led many to worry about the market being overcrowded and potentially becoming overvalued in the process.

When millions of more people begin purchasing something, stocks in this case, the price inevitably climbs higher and higher. This could lead to bubbles forming within the market.

One might say that a simple solution to this problem is to invest in bonds. However, we are in a record low interest rate environment which has pushed bond yields to record lows as well.

Based on the global pandemic, the federal interest rate was cut to near zero. It is also expected to remain this way until we see a full economic recovery.

Bonds used to be a safer alternative to stocks that allowed investors to preserve capital and earn modest returns. Now, most bond yields are not even outpacing inflation.

Ultimately, this crowding of the stock market and record low bond yields have led many investors to seek out alternatives.

In fact, many of these alternative investments have even outperformed the stock market. Farmland, for example, has returned 12.1% annually on average over the last 20 years. During the same time period, the S&P 500 returned just 9.2%.

Why You Should Not Invest?

Alternative investments give investors the potential to further diversify their portfolios while potentially seeing higher returns than traditional assets.

However, there is no such thing as a perfect investment. The main difference between traditional assets like stocks and bonds versus alternative investments is liquidity.

For those who are not familiar, liquidity is simply a measurement of how easily an investment can be turned into cash.

Stocks and bonds have high liquidity because they trade on a major exchange. You can turn these investments into cash in a matter of seconds by initiating a sell order.

Alternative investments, on the other hand, do not often have this same liquidity.

When you invest in an alternative asset, such as farmland, you should be prepared to commit to the entire investment duration.

These online platforms for alternative investments give you a general idea of the time horizon of the investment.

For example, on AcreTrader you should be ready to commit to a 3 to 10 year timeline depending on the investment. Some of these platforms offer a secondary market where you can sell your shares, but not all.

This lack of liquidity is actually a positive for some investors, because it prevents you from falling into panic selling.

During times of uncertainty, a lot of investors make impulsive decisions. The most common one is to sell your assets during a crash or correction.

The reality of the situation is, this is almost always one of the worst times to sell. In a sense, these illiquid assets are truly protecting you from you.

Final Thoughts

Alternative investments carry a lot of benefits, but the lack of liquidity may be a deal breaker depending on your priorities.

For those who are comfortable with longer term investments, this may be something to consider outside of the traditional stock and bond investments.

Regardless, alternative investments are something we should all be considering as we continue looking for ways to diversify our portfolios and seek out returns.

It is entirely possible that we will not be able to rely on stocks and bonds as we did before for sound investment returns.

If you are interested in seeing the opportunities available on AcreTrader today, you can visit the Current Offerings page to explore.

To read more articles from Ryan Scribner, you can visit Farmland Riches.