Alternative Investments: Why You Should Think Outside of Stocks
Say the word “investment,” and most will envision the bustling, high-stakes New York Stock Exchange trading floor or an outdated home purchased and flipped for a hefty profit. While both can be lucrative options, these traditional investment models are just the tip of the iceberg. More than ever, people are turning to alternative investments to get more for their hard-earned money.
Traditional investments are well-known and the most accessible to retail investors. These investments include the following:
- Mutual Funds
- Real Estate Investment Trusts (REITs)
- Exchange Traded Funds (ETFs)
- Residential Real Estate
- Cash and cash equivalents (e.g., money market accounts and bank certificates of deposits)
Alternative investments are any non-traditional investment that does not fit into any of categories listed above. They tend to have an inverse relationship to traditional investments and, therefore, can be extremely useful for diversifying an investment portfolio.
Alternative investments come in many forms and include the following:
- Commercial Real Estate
- Foreign Currencies
- Precious Metals
- Debt (e.g., peer-to-peer lending)
- Hedge Funds,
- Private Equity
- Venture Capital
- Privately Held Companies
- Cryptocurrencies (e.g., Bitcoin)
- Fine Art and Collectibles
As compared to traditional investments, alternative investments generally offer:
- Significantly fewer regulations than traditional assets
- Decreased volatility
- Less correlated than traditional assets that trade publicly
- Higher complexity
- Less liquidity
- Above-average returns
- Better tax advantages
Historically, the alternative investment market was mainly accessible to high net-worth investors, and the market comprised only a relatively small segment of the global investible market. However, the market’s size and investor interest continues to grow.
Investors have been increasing their allocations toward alternative investments to reduce risks and enhance investment returns. In particular, stock market volatility and drawdown have prompted them to reduce the downside risk in their investment portfolios through alternative investments. Also, the financial markets are seeing historically low and declining interest rates, as over $17 trillion of global negative-yielding debt has further pushed the need for higher yields and income-producing assets.
According to the Chartered Alternative Investment Analyst Association (CAIA), the alternative investment market increased from 6 percent to 12 percent of the global investible market between 2003 and 2008. Furthermore, CAIA has projected that the alternative investment market will increase to 18 percent to 24 percent of the global investible market by 2025. This would constitute a significant share of the global investible market.
Commercial real estate in the United States has been one of the most favored investment sectors for obtaining enhanced yields and income-producing assets. In the last several years, the growth of online crowdfunding platforms and private equity companies raising investor capital via syndications has made the sector readily accessible to motivated investors.
Investing in alternative investments such as syndicated commercial real estate provides opportunities for investors to obtain above-average returns while simultaneously reducing volatility and maximizing tax efficiency. Ultimately, investors can achieve meaningful investment returns, participate in investments that enrich lives and provide societal benefits, and generate multiple income streams to live the life they desire.
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