The Top 5 Alternative Investments for 2021
Many people picture investing as stocks and bonds. Adventurous investors might think as far as real estate investing.
But smart investors think of alternative investments.
Alternative investments were once the purview of the highly wealthy and institutional investors, but these days, everyday investors have come to recognize alternative investments as a fantastic tool to diversify their portfolios. The trick is knowing where to begin. Here’s a look at our top 5 alternative investments for 2021.
What are Alternative Investments?
Don’t let the name steer you off—alternative investments are simply investment assets that don’t fall into one of the three conventional investments:
Only it’s not quite that simple. The term alternative investment is an incredibly broad category, and it can include almost anything from high-end wine to minerals to hedge funds. Generally, though, alternative investments are more illiquid than their conventional counterparts and are a great way to diversify your portfolio since they don’t move with the stock market (and often move in the opposite direction of stock market whims).
Our Top Alternative Investments for 2021
How do you begin with alternative investments? Don’t worry—we’ve done the work for you. Here’s a review of our top 5 alternative investments for 2021.
Who knew a Picasso or a Dali could be an investment? In fact, blue-chip art is an increasingly popular way for art collectors to invest against inflation.
The term “blue-chip” came from the stock market—specifically, a Dow Jones employee named Oliver Gingold, who coined the term in 1923 for stocks trading at $200 or more per share. It refers to the blue chip in poker, which is the most valuable chip on the table.
Similarly, blue-chip art is highly valuable, highly profitable art whose economic value is expected to hold steady or increase over time, often made by icons like Picasso or Miro who have proven themselves heavyweights in the auction market thanks to consistently high auction prices. To be clear, blue-chip does not refer to the art’s value to the collector, a museum, or even history—it refers solely to the art’s resale value.
Here at Masterworks, we offer one of the few avenues for the average Joe to invest in (and earn profits from) multi-million-dollar artworks. It’s a lot like crowdfunded real estate—we purchase art, then let our investors buy a small ownership stake. In the meantime, we file an offering circular with the SEC so you’re protected by securities laws. Then, when we sell the art, you get to benefit from the profits.
Cryptocurrency was once the sole purview of underground enthusiasts. These days, it’s gaining increasing prevalence as an asset class.
Cryptocurrency, or crypto, does not correspond to any national currency. In fact, cryptocurrency has no central issuing authority (unlike, say, the US dollar, which can only be issued by the United States Treasury). Instead, cryptocurrency is built on decentralized networks using blockchain technology and secured by cryptography.
This makes cryptocurrency incredibly difficult to hack, virtually impossible to counterfeit or double-spend, and (theoretically, at least) immune to government interference.
There are two things to know about cryptocurrency. First, it is highly volatile. Second, if it has a place in your portfolio, it should be in the highly speculative portion.
Peer-to-peer lending is a relatively new phenomenon. It refers to the practice of lending money to individuals or institutions without a financial intermediary.
Typically, your money is pooled with other investors’ money, and together, you make a loan to the person or institution asking for funding. You earn money in two ways: repayment of the original loan balance and interest on the original loan.
On one hand, the returns from P2P can be much higher than traditional options. On the other hand, P2P is often riskier, since you’re often lending to people who couldn’t get funding through traditional loan outlets (this could be for any number of reasons, like a startup without the revenue or operational record to qualify for a bank loan). For this reason, it’s essential to do your homework and set thorough parameters when selecting a borrower.
Collateralized loan obligations, or CLOs, are basically a portfolio of leveraged loans (loans made to someone who is considered highly risky). A CLO is a single security backed by a pool of debt, a process called securitization.
In a CLO, investors receives scheduled debt payments for the underlying loan. You assume most of the risk if the borrower defaults, but in exchange for that risk, you get significant portfolio diversity and the potential for higher-than-average portfolio returns.
With CLOs, you have to think about tranches—the securities are sold in tranches, and each tranche has a different priority level on cash distributions and a concurrent level of risk exposure. You select tranches based on your risk/reward profile. The higher-rated the tranche, the less risky the investment and the lower the return.
Okay, we’ll admit gold is hardly a new investment vehicle, but it’s also widely recognized as a great portfolio diversifier, a tangible inflation hedge, a liquid asset, and a long-term value store.
This is for one reason: gold has a low correlation with other asset classes, particularly stocks. In dire times, this becomes even more pronounced, since investors often turn to gold as a rescue asset.
For small investors, your best bet is to invest directly in gold, which typically means buying gold bullion (forms of physical gold). As a rule, a 5% to 10% portfolio allocation for gold is considered healthy diversification.