Diversifying your investment portfolio is more important than ever in today’s shifting financial environment. Alternative investments offer unique opportunities from traditional investment avenues like stocks and bonds. By including alternative assets in your portfolio, you boost its performance and position yourself more favorably for lending opportunities.
Due to AI lending and AI-powered credit analysis enabling a more inclusive and precise evaluation of borrowers’ profiles, a well-rounded portfolio with a mix of traditional and alternative investments like gold bullion increases the likelihood of approval and reduces risk for the lender.
Discover why you should have alternative investments and how these assets make you a desirable candidate for a home, business, or vehicle loan when needed.
What Is an Alternative Investment?
An alternative investment is a financial asset that does not fit into the conventional categories of stocks, bonds, or cash. These investments have a low correlation with standard market investments, offering a way to diversify a portfolio and potentially reduce risk.
However, unlike traditional investments, alternative assets often require more specialized knowledge for investment and management. They may also have higher minimum investment thresholds and limited liquidity.
Alternative investment assets often include:
- Real estate. This typically includes commercial properties, rental units, or real estate investment trusts (REITs). These properties can enhance your investment portfolio and provide extra monthly rental income from tenants.
- Private equity and venture capital. Private equity and venture capital investments go directly to private companies or funds supporting startups. If these companies succeed, these investments can lead to outsized returns, particularly when they go public or are acquired.
- Hedge funds. These funds use advanced investment strategies like short selling or leveraging them to maximize returns and manage risk. Hedge funds can diversify your portfolio due to unique strategies designed to generate positive returns in various market conditions.
- Commodities. This includes investing in physical goods like precious metals, oil, or agricultural products. Commodities protect against market volatility and inflation. They often hold value inversely to stocks and bonds, providing balance in your investment portfolio.
- Collectibles. Items like art, vintage cars, numismatic coins, or rare wines can be savvy investments. Their value lies in the item’s scarcity, historical value, and desirability among collectors, offering an alternative asset class that doesn’t typically align with traditional financial markets.
Top 3 Reasons to Have Alternative Investments
Alternative investments are not just for the wealthy. Thanks to emerging AI-powered application processes and alternative lending companies, they’re becoming more accessible to everyday investors.
Let’s explore the key reasons why they should be a part of your financial strategy:
Low Volatility
Unlike the fluctuations common in traditional stock market investments, many alternative assets have a more stable value over time. This low volatility makes alternative investments an appealing way to build capital and diversify your investment portfolio, especially during economic uncertainty or market turbulence.
For instance, real estate market movements are more gradual than the stock market. This is because real estate values are tied to physical property, which doesn’t fluctuate as quickly as stock prices. This slower pace means real estate can be a stable investment because it is less susceptible to sudden market changes.
In uncertain economic times, commodities often hold their value better than stocks. Precious metals like gold, in particular, exhibit low volatility. Their prices aren’t as linked to the highs and lows of the stock market, making them a reliable option when other investments are struggling.
For instance, gold has almost consistently risen in value over the last 55 years since 1968. It increased from about $50 per troy ounce that year to just over $2,000 in November 2023.
Tax Benefits
Alternative investments offer tax benefits that set them apart from traditional investment opportunities. Benefits depend on the type of investment but often include potential for deductions and favorable tax treatment of income and gains, making them an attractive option for tax-efficient investing.
For example, real estate investments offer benefits like tax deductions for expenses, including mortgage interest, property tax, operating expenses, and repairs. You can also deduct ordinary and necessary expenses for managing, conserving, and maintaining the rental property. These include interest, taxes, advertising, maintenance, utilities, and insurance.
Alternative investments operate independently of the stock market, making them a great way to balance and diversify your investment profile. The stock market is known for its volatility and can be challenging to predict, with prices influenced by economic indicators, global events, and market sentiment.
Alternative investments follow different dynamics based on a separate set of factors. This makes them valuable for investors seeking to diversify their portfolios and reduce overall exposure to stock market risks.
For example, collectibles’ value can depend on collector trends, the item’s condition, historical significance, and rarity. Commodities like platinum or oil are based on supply and demand, geopolitical events, and currency fluctuations.
The unique and often uncorrelated market factors driving alternative investments make them ideal for diversifying portfolios and mitigating risk.
Strengthen Your Investment Portfolio with Alternative Assets
Improve the balance and stability of your investment portfolio by incorporating alternative investments into your repertoire. Alternative investments protect against market volatility, come with attractive tax benefits, and make you a more desirable borrower when applying for a loan. Adding alternative investments is smart for any investor, helping you create a more resilient and diversified portfolio, ready to withstand market fluctuations and grow your wealth.
