The Private World of Alternative Investments
What are they and how can you get in on the action
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Public vs Private
To properly define alternative investments, you must start with why they are labeled as “alternative.” This has everything to do with their accessibility.
Alternative investments are in a league of their own because they are usually harder to buy, sell, and trade, making them more private. The flip side to that is assets like stocks, bonds, and cryptocurrencies which you can buy, sell, and trade all day long if you wanted to. Therefore, they can be labeled as more publicly available.
Characteristics
Below are some traditional characteristics of, or reasons why something would be labeled as a private investment:
These types of investments are unregulated. Everything on the public markets, like stocks, are under the watchful eye of the SEC (Securities and Exchange Commission). Alternative investments, however, are not. You will see later by the examples of these investments why.
Alternative investments are harder to sell. This goes back to the idea of accessibility; you cannot just click a button and turn these investments back into cash as you can with a stock.
These types of investments do not move in tandem with the broader market. Since they are not attached to the economy in lock step, they do not always turn upward or downward in value like you will see with the stock market. This diversification is one of the arguments for owning alternative investments.
Now that we have the definition locked down, most of you are probably thinking, “Get on with it, Griffin, what are the different types of alternative investments?”
Well, without further a due, let us dive a little deeper into the world of alternative investments and what some of them look like.
Alternative Investments
Collectibles
In my opinion, this is the most fun alternative investment and by far the most accessible. With the websites and applications available to us today, trading is nearly centered around these items. The definition of collectibles is ever-changing as this can encompass anything that, “at least two people define as valuable.” Below are some examples you or your family might own:
Great conditioned collectible toys
Sports cards
Rare, old coins
Art (Paintings, NFTs, Sculptures)
Classic cars
What is interesting about these types of items is their value can shift dramatically or become more valuable over time for various reasons. The condition and popularity of the item will really dictate its long-term value.
Commodities/Natural Resources
Commodities are classic, natural substances that have high value in our world. Things such as oil, gold, silver, land, wood, etc. are all examples of commodities. In today’s world, the price of oil and wood have hit decade highs because the demand has skyrocketed – but supply is limited. This, in turn, drives up the investment value.
How do I invest in natural resources? You may have some gold already in your jewelry, but the best way to invest in these things is to buy futures or options on these items. Example of popular oil future: NYMEX WTI Light Sweet Crude Oil futures.
Try to think of this process as the same as buying stock. This will help prevent you from feeling overwhelmed.
Source: https://www.axi.com/int/markets-to-trade/commodities/how-to-trade-commodities
Real Estate
Everyone’s favorite alternative investment. Ownership of a property is the name of the game. It is listed third because housing prices rise a lot, and people do not give enough credit to how hard it can be to own a property. Similar to commodities, supply and demand drive the competition.
Real estate, however, is a great form of an alternative investment if you can get your skin in the game. Whether that is a personal home that may rise in value over time or if you own a building you rent out to tenants who provide a passive income.
There are many avenues you can take with real estate!
Funds (Hedge Funds, Venture Capital Funds, Private Equity Funds)
I am grouping these all together as they have a lot of similarities and are basically the same thing.
A high-level overview of funds are that they are essentially a lot of money pooled together that strives for the same purpose. The purpose is obviously high returns on that money, but each of these can have different goals. Below is a quick breakdown:
Private Equity Funds: Pooled investment to secure a controlling stake in a company. When they acquire this stake, you usually see changes in company direction in which growth is the main objective.
Hedge Funds: Pooled investment where a hedge fund manager controls the investment strategies and trades that take place. Usually more complex and riskier moves are made to maximize money growth opportunities.
Venture Capital Funds (“VC” buzzword you probably see on Twitter): Pooling of money to exchange with startups in returns for equity in the company. Long-term investing approach where these investors help bring startups all the way to going public before seeing returns on their money.
Source: https://www.lebow.drexel.edu/news/mutual-funds-increasing-investments-private-companies-who-benefits
As you can see, they all have the same goal: let your money work for you. These three are probably the hardest to get access to for most normal investors (like you and me). However, there are platforms coming out trying to make venture capital more accessible to the public.
Pros/Cons of Alternative Investments
Below is a little scoreboard, if you will, to help you understand the broader picture of alternative investments. Below is a chart I made to easily break all the pros and cons down:
Takeaways
If you take anything away from this article, take the fact that investments are not just stocks. Investments can be anything that people hold value too. A lot of people do not even know they are ~technically~ investors with some of the items they or their families own.
Ownership is such a powerful pillar to financial success/freedom. I push everyone to learn more about investing in all aspects and learn what forms can most benefit you and your financial goals.
Want to learn all the vocabulary that goes with investing? My last article detailed the 30 most important terms every investor should know. Check it out below and continue your investing journey today! 👇
The Essential List of 30 Investing Terms - Defined
Cheers!
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