13 Types of Alternative Investments
Smart money management isn’t only about paying bills, prioritizing spending and saving. It’s also about investing and growing your money. But investing can be intimidating if you don’t understand your options. Traditional investments — such as stocks, bonds and mutual funds — are excellent if you’re just getting started. But as you become a more savvy investor, you might widen out and explore different types of alternative investments.
What Is an Alternative Investment?
An alternative investment is any investment that doesn’t fall in the realm “traditional” securities such as stocks, bonds or mutual funds. Whether you have a little or a lot to invest, there’s an alternative investment within your reach.
These investments are worth consideration if you want to diversify your portfolio and achieve higher returns. However, alternative investments aren’t for everyone. Due to the diversity of investments available, as well as the nuances and regulations associated with each, it’s important you understand the market well before putting any money into it.
Here are 13 types of alternative investments you might be interested in exploring:
Types of Alternative Investments
1. Real Estate
Investing in commercial or residential real estate can be profitable as a short-term or long-term investment strategy. You can purchase properties below market value, renovate and then sell these properties for an immediate profit. Or you can purchase rental properties and earn consistent monthly income from your tenants.
The downside is real estate investing generally requires a large initial investment. Sure, you can get a bank loan to cover the purchase price, but you’re responsible for other costs associated with buying a property like down payments and closing costs. Additionally, you’ll need cash to maintain and fix up properties you’re flipping or renting.
There is, however, good news. Real estate investment trusts can reduce the amount you need to start investing. As a real estate investor you can take advantage of tax deductions to reduce your tax liability and keep more of your profits. And since real estate tends to appreciate over time, the equity you gain from buying and holding real estate can be a powerful asset when you’re ready to retire.
2. Hedge Funds
If you’re a seasoned investor with plenty of cash, you can diversify your portfolio by investing in hedge funds. This investment strategy works similar to a mutual fund, in that you’ll pool your cash with other investors to invest in securities and other instruments.
Hedge funds have a manager who oversees the fund and chooses the best investment strategy. Hedge funds have a more aggressive investment approach, which often means higher returns on your investment. Unfortunately, hedge funds are only for wealthy investors.
This type of investment typically requires a minimum investment of $1 million, and Robert Johnson, CEO of theAmerican College of Financial Services, said that high fees are a common characteristic of hedge funds.
“The standard hedge fund fee structure is 2 percent of assets for asset management,” he said. “In addition, hedge fund managers take 20 percent of investment profits.”
3. Peer-to-Peer Loans
Peer-to-peer lending is an alternative to traditional bank loans. Borrowers can often receive money from private investors at a lower rate. And as an investor, you can lend money to complete strangers and earn interest on the loan.
You don’t need a lot of cash to get started. Some P2P lending sites only require investors to make minimum loan amounts of $25 per note.
Unfortunately, there’s always the risk of borrowers defaulting on their loans. Since these are no-collateral loans, there’s no security to protect your investment. However, you can reduce your risk by only lending to high-rated borrowers — and only lending what you can afford to lose. Peer-to-peer lending sites like Prosper and Lending Club rate borrowers based on their credit history.
4. Venture Capital
As a venture capitalist, you can get in on the ground floor of a startup or help a small business expand. Business owners who can’t qualify for traditional financing might seek funds from a venture capitalist, which can be for thousands or millions of dollars.
But you shouldn’t invest in any random company. Make sure you believe in the company’s business plan. Investors can receive ownership in the company, resulting in potentially huge returns if the company succeeds. They can also receive high rates from the borrowers.
5. Comic Books
With the success of movies like “The Amazing Spider-Man,” “The Avengers” and more, it’s no surprise that comic books are growing in popularity. If you have a passion for comic books, this might be the perfect investment to add to your portfolio.
Comic book investing doesn’t require a lot of cash to get started. “There’s a comic for every budget and a budget for every comic book,” said Vincent Zurzolo, co-owner of New York-based Metropolis Collectibles, a vintage comic book dealership. “You can spend anywhere from $10 to $2 million.”
Of course, there’s no guarantee a comic book will sell for huge profits. It’s all about demand and timing. You have to know what’s popular among collectors. And it really depends on whether you’re looking for a short-term or a long-term investment.
Zurzolo said that buying pre-1985 comic books is best for long-term appreciation. “Long-term investors should pick comics that have slow and steady growth,” he said, “whereas short-term investors may want to buy books starting to get hot with the intention of selling them quickly before they get cold.”
Maybe you like the idea of owning a business, but you don’t want to start a company from scratch. If you buy a franchise, you don’t have to.
The benefits of buying into a franchise include “name recognition, quick cash flow, ease of obtaining financing (to expand or start), and an established turn-key operation (convenience for purchasing supplies, equipment, etc.),” said Carlos Dias Jr., a financial advisor with Excel Tax and Wealth Group.
Of course, buying a franchise means you might have very little say in how the business runs. Also, buying a franchise isn’t cheap. You might spend several hundred thousand dollars or millions to get started, and you might be required to put up some of your own cash. In addition to startup fees, monthly franchise fees can go as high as 12 percent of gross sales for a chain restaurant, for example.
Wine investing is another alternative strategy for growing your money. Fine wine gets better with age. So a rare, vintage bottle might be worth big bucks to a serious wine collector one day.
Some investors purchase cases of vintage wine with the intent of selling bottles for profit in the future — typically at a wine auction. But since wine is a tangible investment, storage can become an issue. Fortunately, there’s a way around this.
“Wine funds have developed for those individuals who believe that they don’t have the expertise to select the proper vintages or the capability to store the wines,” said Johnson.
Wine funds let investors buy shares in a wine company and earn dividends on their investments. The initial investment varies, but according to Food and Wine, “it can be as little as $20,000, though $50,000 is closer to the norm.” Wine investors should also anticipate fees, about 2 percent of assets under management and 20 percent of fund profits.
If you know how to identify fine art and you’re looking to make a long-term investment, you can buy now and sell for a profit in the future. To help you appreciate the earning potential of art, sales of postwar and contemporary art “have ballooned from $260 million in 1995 to $7.8 billion last year,” according to Bloomberg Business.
If you’re looking for an alternative investment strategy with retirement benefits, consider an annuity — a type of insurance product. The concept behind an annuity is simple. You make an investment in the annuity and then receive regular distributions either immediately or starting sometime in the future. An annuity can be your sole retirement plan, or it can supplement an IRA or a 401(k).
According to CNN Money, annuities are beneficial because invested funds are tax-deferred, and since there’s no annual contribution limit, you can add as much money as you like. Fees should be top of mind, however. CNN Money reports variable annuities have high annual fees; it’s possible to pay up to 2 to 3 percent a year. Withdrawing from your annuity before you reach 59 1/2 could result in a 10 percent early withdrawal fee.
10. Collectible Coins
Collectible coins can be an excellent way to get a fairly decent return on your money in a relatively short time — about a 25 percent return in less than 12 months is common, said experienced coin collector Josh Brooks. The key, however, is knowing the best types of investment coins.
“Stick to graded coins, encapsulated by a reputable coin grading service (PCGS, NGC or ANACS), and avoid ungraded coins as they are too tricky for the novice,” said Brooks. As far as specific coins, Brooks recommends Morgan silver dollars, Peace silver dollars and Franklin half dollars. These are the most popular, most liquid coins, and they can be purchased for less than $100.
Brooks buys and sells on eBay. “The trick is to buy sets either at auction or by negotiating directly with the seller, break the set up, and sell the individual coins.”
11. Tax Lien Certificates
Investing in tax lien certificates is another alternative investment strategy to diversify your portfolio. After a municipality or county puts a lien on a person’s house for non-payment of property taxes, the government might sell the tax lien certificate to an investor at auction.
The winning bidder pays the full amount of the lien to receive a tax lien certificate, which is a claim on the property. Getting a tax lien certificate doesn’t mean the investor owns the property. The owner of the property will pay the amount of the lien, and the investor receives the payment plus interest. If the owner doesn’t pay within this allotted time, the investor can foreclose and, in many states, get the property free and clear, which he can then sell for a profit.
Tax lien certificates carry risks. The property might be located in a bad part of town or require a lot of repairs, at which time you could end up with a property of little value. Or you might discover the property has additional liens, which will make getting the title difficult.
Forex, or the foreign exchange, is the buying and selling of different currencies. It might be the largest financial market in the world, but it doesn’t take a lot of capital to get started with a Forex broker. For example, Forex.com only requires a minimum initial deposit of $250.
As a global market, Forex never sleeps, so there’s the opportunity to invest around the clock. Forex investing is extremely fast and volatile.
13. Whole Life Policy
A whole life insurance policy can do more than provide your beneficiaries with financial support if you die. As a permanent life insurance policy, it also earns a cash value as it matures — so it’s a life insurance policy with a built-in savings account.
There’s the option of borrowing cash from your whole life policy and using funds for a variety of purposes, such as medical expenses, retirement or an emergency.
Keisha Blair, co-founder of Aspire-Canada, said this type of investment is comparable to your own personal bank account. “It’s like a regular account you can use for retirement,” said Blair. “Plus the rates of return have been pretty good, averaging 7 percent or so.”
Any funds you take from a whole life policy are deducted from the death benefit paid to your beneficiaries.
A regular savings account isn’t going to offer the highest return on your money. And even if you dabble with stocks, you might not receive the desired return. Sometimes, you have to do more. Exploring different types of alternative investments gives your portfolio the power it needs to grow and achieve your financial goals.
This article by Valencia Higuera first appeared on GoBankingRates.com and was distributed by the Personal Finance Syndication Network.