The Informed Investor

Alternative Investments: An Atypical Guide to Investment Diversification

Brett Myer, Vice President of Investments and Research, ICC

February 4, 2019

Whether you’re a seasoned investor or just getting started, the most common advice you may have heard is the importance of a diversified investment portfolio. This means investing your money in various types of assets and financial markets, both domestic and international, to help ensure that your funds are not solely dependent on one country’s economy or a certain business sector.

Most advisors recommend more traditional assets like stocks and bonds for their accessibility, liquidity, and relatively forecastable long-term performance. While these options are essential for an efficient portfolio, many investors seek additional asset classes for even greater diversification. We’re here to talk about some of those other investment options that might be a bit unconventional compared to typical publicly traded investments.

Ideally, these alternative investments won’t be tied to the movement of the stock or bond markets and tend to be more difficult to forecast as a whole over the long-term, which is why it is recommended to allocate only a small amount of funds in this category. Alternative investments may provide hedges against inflation too. The industry consensus says that about 5-10% of a portfolio should be in alternative investments. While alternative investments are often less liquid than stocks or bonds, they may yield higher returns given a time horizon is long enough.

What are considered alternative investments?

Real estate is the most common alternative investment that people may already own. For example, rental income and property equity can turn out to be a large amount of an investor’s overall net worth. Many investors fail to achieve adequate diversification when implementing these strategies. Therefore they are not likely to achieve optimal benefits.

Each investors’ needs are personal and specific, therefore we don’t recommend investing in all of these alternative options, but here a few areas for you to explore:

Real Estate is the most common of alternative investments, whether you’re buying a home for rental income, or purchasing property to flip and sell.

Precious Metals are another common alternative investment. You can invest in precious metals by buying gold bullion or through mutual funds, for example. You can also choose to invest in mining companies.

Private Equity. Ownership in companies that are not readily traded on the open market through stocks.

Venture Capital or Angel Investing. This one can be more difficult to implement effectively since a low probability of opportunities results in high profitability. Those who got in on Airbnb, Lyft or similar ride and homeshare services early were angel investors. A venture capitalist is someone tasked with finding these opportunities for you, and they charge a handsome fee for their services. This is an option for those who don’t know where to begin looking for startups to invest in.

Collectibles. Art, rare coins, designer handbags, first edition books, and so on. Whatever your particular interest, it is likely there is a collection for it, rare and limited items that can potentially increase in value over time due to its scarcity. Many people get joy out of owning one-of-kind items that double as investments! This market is highly illiquid and is dependent on finding the right buyer.

These are just some of the different types of alternative investment options. The common theme among them is that they tend to provide greater diversification from the movements of the more traditional markets, but they may also be more volatile, less liquid, and require larger amounts of upfront capital and a longer time frame.