Here at Rocket Dollar, we spend a lot of time talking about alternative assets and why they are essential to a diversified portfolio. However, we don't spend much time talking about what exactly is an alternative asset.
An alternative asset is any investment in anything that is not stocks, bonds, or cash. With that definition, it is easy to see that the definition encompasses a broad range of investments, from collectibles to precious metals, to financial assets such as real estate, cryptocurrency, venture capital, and more.
With such a broad range of investments falling under the umbrella of alternative assets, it's helpful to understand the individual characteristics of each asset class and how they all fit together inside of a well-diversified portfolio.
There has been an explosion of interest in the last few years as news has spread about the returns some investors have generated, as well as a host of technology platforms that have made accessing different investments more accessible than ever.
Due to the sheer range of investments considered alternative investments, often, alternatives are less tied to the movements of the public markets and rely more on the strength of the individual investment. Alternative asset investing is a great way to hedge your overall portfolio and reduce exposure to the whims of the market while generating steady returns. Others seek exposure to assets that are almost entirely passed over by public markets.
Real estate has historically been one of the most popular alternative investments. Whether investing directly into a property or participating in a syndicate, real estate is one of the most popular types of alternative investments.
Investors make money on real estate assets mainly by collecting rental income and appreciation of the property. Real estate can provide passive income, stable income, tax advantages, and diversification, unlike many publicly traded securities.
A cryptocurrency is a digital form of currency based on blockchain technology. The blockchain allows for a distributed ledger between a disparate network of computers and is gathering quite a bit of attention from financial technology innovators. Bitcoin and Ethereum are the best-known cryptocurrencies, but there are over 10,000 in existence.
While still considered a new type of alternative investment, it is clear that crypto is here to stay. Its novelty means that as adoption grows, it presents an opportunity to investors as crypto goes mainstream.
Investing in startups and generating the types of returns we read about in the news has historically been limited to a select group of folks who had the money to invest the significant amounts required to invest in early-stage companies and the access to the entrepreneurs starting these companies. However, the rise of crowdfunding platforms combined with legislation that raised the amounts of money that companies could raise from non-accredited individuals means that raising money via crowdfunding is an avenue many companies are considering.
When retirement investors choose to invest in a startup, they typically allocate a small amount of money into a higher-risk asset or spread their risk around various companies by themselves or with a venture capital fund. Strategically using a tax-advantaged vehicle can blunt high taxes if one startup investment finds significant success.
For a more in-depth look at alternative assets, and what you can and can’t invest inside of an IRA, check out the ebook our team wrote. It’s packed with tons of great information!
Depending on the type of investments you find attractive, odds are there is a platform out there that allows you to invest the amount you can comfortably invest.
We also maintain a partners page with companies that our customers have invested with in the past. Though they appear on our website, you must conduct independent due diligence while evaluating or making any investment.
Investing in alternative assets can be a powerful way to diversify your portfolio and hedge against public markets while generating outstanding returns. However, like any investment, it is crucial to learn about the potential risks involved with any investment.
If you'd like to learn about how you can use your retirement savings to access most alternative investments, please reach out to our team!