Taking a Closer Look at Four Off-Kilter Assets That Can Diversify Your Portfolio and Form a Stable Counterbalance to Your Stocks

There are four main categories of asset concepts: Cash, stocks, bonds, and one final miscellaneous bin for everything that doesn’t quite fit into the first three. It’s the latter of these investable areas, the mysterious miscellany bin, that we’ll be peering into today.

If you’d care to take a peep, you’ll find four discrete, primary asset classes that have little to do with one another, yet are often overlooked due to their existing in this ill-defined final asset category. The four outcasts are as follows…

• Commodities
• Collectables
• Real Estate
• Private Equity

What Exactly Is an Alternative Investment

An alternative investment could be any number of things. They’re mostly tangible, such as a building, land, a bottle of fine wine, a painting, or perhaps even a piece of antique furniture, but it doesn’t have to be —  derivatives also fall under the alternative umbrella.

Despite the variety of these assets, one common thread links them: They’re unregulated by the Securities and Exchange Commission (SEC). Traditional investments, on the other hand, are heavily systematized with fraud protections and disclosure regulations.

If you want to enter into the alternative investment sphere, the investor is burdened with protecting themselves. For example, if you invested in a piece of art that turned out to be a forgery, you’re stuck with it, with no means to recoup your money.

Marry this high risk with even higher entry prices, and there’s no surprise that, historically, only very experienced investors with plenty of money and a comprehensive understanding of complicated financial markets could get in on the action. However, times are changing.

Thanks to share splits and mutual funds, the alternative investment market is opening up to a broader spectrum of investors, so there’s never been a better time to familiarize yourself with the possibilities.

Commodities

What Are They?

In this context, a commodity is a fungible natural resource, such as raw metal bullion, natural gas, oil, foodstuffs such as beef, or (for the vegan investors out there) grains. You can either purchase shares in these commodities or own them directly.

What’s the Big Idea?

The commodity market is an enticing prospect for those already knee-deep in stocks and bonds due to the fact that when traditional markets wane, commodities thrive, making it a safe hedge against loss on more typical investments.

In terms of return, if you own shares in a commodity, you’ll earn dividends when the asset performs well in the market, but if you own the entire commodity, selling up is the only way to draw a profit.

What Else Do You Need to Know?

The pricing of commodities is determined by scarcity and demand, which makes it quite a volatile market. Commodity futures contracts are a popular way to invest. They’re an agreement to buy or sell a commodity at a set point in the future or within a certain window. Essentially, this means people bet on the price of a certain commodity rising or falling, and if they’re correct, they’ll make some money.

Futures contracts can be a tricky thing to wrap your head around, so it’s best to start your investment elsewhere. A good jumping-off point would be to invest in a company pertaining to the stock rather than the stock itself. Once you’ve more familiar with the market, you’ll be able to take bigger risks with confidence.

Collectables

What Are They

Collectables are exactly what you’d imagine they are — keepsakes that you hope will appreciate in value someday.

Almost anything could be considered a collectible asset, but the most popular at the minute include works of art (Masterworks’ speciality), fine wines, vintage cars, rare books, and jewelry.

What’s the Big Idea?

Collectibles do what many other forms of investments cannot… provide personal satisfaction beyond that of making money, but speaking of money, they’re not always a good choice if you’re looking for a large or quick return on your investment.

The value of a collectible is determined by a few things:

1. Condition
2. Completeness (if we’re talking about a collection)
3. Age
4. Rarity

But more important than any of these factors is someone else’s desire to own it as much or more than you do.

What Else Do You Need to Know?

Determining the market worth of collectibles can be exceedingly difficult, as trends come and go (remember the Beanie Baby craze of the late 90s?), and besides auction records, there is very little transparency when it comes to historical pricing.

Unless you yourself have expert knowledge in the field, it’s best to enter this sphere through an investment platform run by experienced veterans of the market, which is exactly what Masterworks is.

Real Estate

As we’re sure you’re aware, real estate refers to the acquisition of land and property to reach the long or short-term goal of financial gain. It doesn’t matter if it’s the home you’re living in, a shopping center, or a field… It’s all real estate.

What’s the Big Idea?

There are three ways to draw a profit when investing in real estate…

1. You could flip it for more money than you paid, either by improving the property or land, or waiting for an organic spike in the market.
2. You can lease or rent the property.
3. And sometimes, very rarely, you may discover valuable commodities, such as oil or various mineral deposits on your land.

What Else Do You Need to Know?

The real estate market fluctuates quite significantly over long periods of time, so investing can be a risk, but you can offset the risk slightly by making improvements to the property.

Renting your property to others is a steady way to make a return on your investment, but, as a landlord or lady, you’ll be taking on some pretty hefty responsibilities, and you won’t always be dealing with your dream tenants.

Perhaps an easier way to expose yourself to this alternative asset is to invest in a publicly-traded real estate investment trust (REIT), as it’s a low responsibility, liquid entry point.

Private Equity

What Is It?

In a way, private equity is similar to real estate, but for privately held commercial partnerships or companies. You inject funds into a business of your choice in the hopes that it has a strong trajectory, so you can cash in when it becomes more successful.

Alternatively, much like real estate, your investment can go towards reorganization and improvements within the company, so you can still sell up for a profit.

What’s the Big Idea?

There are two options here…

1. Angel investing — Buy stakes in the company early on to aid in business expansion.
2. Buyout when the company is more mature and defined.

Regarding the latter, the investing firm utilizes its business acumen to reshuffle the company, then seeks a return by either selling its stake or taking the company public to generate more funds for expansion.

What Else Should You Know?

Typically speaking, the minimum buy-in for private equity is around $25,000,000, so it’s not normally a serious consideration for the average investor. However, crowdfunding and “funds of funds” (a collaborative fund to fund a larger fund) mean it’s not an impossibility.

Final Thoughts

Alternative investments have amazing diversification potential, but the lack of regulation and the limited liquidity options are serious drawbacks for the novice investor.

Experts with years of experience dealing with these complex markets stand to make a lot of money by peering into the miscellaneous bin, but it requires a sophisticated approach and honed business senses.

That’s not to say you shouldn’t give it a try if you’ve got an in, as everyone has to start somewhere, but unless you’re using a platform such as Masterworks that has a specialized team of experts to aid in the investment process, be prepared to put in a lot of work.