How to Choose the Best Alternative Investment for You

In any volatile market, you’ll find an increased interest in alternative investments. Alternative investments do not correlate with market conditions like traditional stocks and bonds do. It makes sense that investors would look outside the market when the market itself seems uncertain.

While we throw around the concept of “alternative investments” quite freely, the full spectrum of alternative investments is incredibly varied—both in terms of risk and potential return. Below, I’ll share examples of ways to make an alternative investment that works for your specific financial needs in 2019.

Vintage Cars, Agriculture, Real Estate—Which is the Best Investment?

As I mentioned above, alternative investments are just that—alternatives to investing in the standard marketplace. This could mean investing in fine art … medical office buildings … vintage cars … cannabis … you name it. Although these are all called alternative investments, the reality of these investments vary widely, from how much you need to invest up front to how long your money will be locked up, how much decision-making power you have in the investment process, and how much return you can expect year over year.

Let’s take a look at vintage cars, for instance. They returned nearly 300 percent in the past decade, or more than twice the S&P 500 Index. But will every Ferrari bring a big paycheck? Absolutely not! Unless you’re knowledgeable about restoration, maintenance, and culture—and have the ability to invest hundreds of thousands of dollars to invest in a single vehicle—vintage cars may not be an ideal investment opportunity for you.

Let’s take another more common example: commercial real estate. Even within the same asset class, returns can vary widely. In 2018, one-year returns varied between less than 5 percent for retail up to nearly 13 percent for senior housing last year. There are also different ways to invest in each sector: direct investments, equity fund investments, REITs, and hedge funds. All require different investment thresholds and risks. Someone interested in commercial real estate would need to think hard about which sector most interests them, and which has the most financial promise.

The following questions should help guide you in the investment selection process.

Do I want to play an active or passive role in the investment? This is an incredibly important question with any investment. Active investments allow the investor more control over invested capital. However, this also requires the investor to constantly monitor or manage the investment. Passive investments allow the investor to experience the performance of an investment, while leaving the control of the investment in the hands of a third party, such as a fund manager. Many people often mistake what a true passive investment is. It is incredibly important to understand that in a true passive investment, there is absolutely nothing the investor can do or say to influence the direction capital is placed or the performance of the investment. It is vital that you research passive investments and ensure they will be managed well.

How long do I want to lock up my capital? This is also an essential question. If you’re comfortable holding your capital in one investment for five to 10 years, a private equity fund may be good for you. If not, you may consider a REIT, which allows for more fluid use of assets.

How much risk am I open to? Be honest with yourself when answering this question. If you’re into high-risk investments with high potential yield, you may consider a hedge fund, which could also provide diversification because it may invest in numerous different alternative investment asset class. If you’re into low-risk investments, you may consider investing in something like senior housing or storage units, as they tend to do well even during periods of economic decline. In fact, both can be used to stabilize your portfolio.

How much money do I have to invest? Hedge funds, private equity funds, and vintage cars may have high investment thresholds, while REITS and other crowd-funding opportunities may have much lower ones. Be honest about how much capital you can safely tie up before deciding which is right for you.

What industries interest me? Maybe you just want to collect returns, and that’s OK. But maybe you would enjoy making an impactful investment in something you’re passionate about, be it technology, international development, or senior housing. It’s truly up to you.

Alternative investments run an incredibly wide spectrum, each developed with different investor preferences in mind. As with any investment, it’s up to you to do your research before switching up your portfolio or jumping into the market.

Quinn Brewer is a communications expert for Senior Living Fund, a private equity company that invests in quality senior housing opportunities nationwide. He lives in Kansas City and can be reached at [email protected].