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Sometimes it’s good to be different not just in life but also in your investments. Many of us are invested in the stock market through retirement plans or directly owning stocks. Nearly 46% of people in the US hold mutual funds. Approximately 56% own stocks. However, many of us are concentrated in these asset classes.
But diversification is a good thing when it comes to investing. Other types of investments can provide diversification to portfolios overly concentrated in equities, bonds, and cash. Sometimes alternative investments can provide excellent returns but sometimes not. There are many types of alternative investments, and some are obscure and not easily accessible to retail investors. For instance, artwork and collectibles are complicated for the average retail investor to purchase.
That is because artwork and collectibles are subject to counterfeiting, are illiquid, and determining valuation is difficult. However, here are five types of alternative investments to look at that are more common. One note of warning, though, these investments are not for everyone since some can be riskier than stocks, bonds, and cash.
3 Types of Alternative Investments
The first alternative investment on this list is gold. Gold has a long history as an investment due to its status as a precious metal. Today, gold is classified as an alternative investment, but it is easily traded. Most people don’t own gold coins or gold bars. Indeed, a recent survey states that only 10.8% of Americans own gold. A percentage that is low compared to stocks and mutual funds. Some of you may own 14 ct or 22 ct jewelry. However, this is not typically an investment but rather to wear.
Gold has some advantages as an investment in that it is considered a store of value, which is especially true during times of inflation when the price of gold goes up as other prices rise. In addition, governments around the world buy and hold gold as reserves. Fort Knox has about 147.3 million ounces of gold held at a book value of $42.22. Other countries own lesser amounts in their reserves. The spot price of gold is approximately $1,758 per ounce today. The dollar value of the Fort Knox gold reserves is about $260 billion.
Real estate is an alternative investment. Your primary home does not count as an investment. However, many investors own residential rental properties to generate passive income. Other investors buy, fix, and flip real estate. Real estate is also an inflation hedge, and there are potential tax benefits.
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This approach is a viable and accepted way to millionaire status, as illustrated by many millionaire interviews. You need some capital to invest in rental properties, and there are risks. Real estate can decline in value, such as during the sub-prime mortgage crisis. There are also headaches related to maintenance, insurance, and tenants.
Real estate investors can also own commercial rental properties. But buying office buildings, apartment complexes, warehouses, storage facilities, cell phone towers, and other types of buildings is difficult. Investors typically need more capital and knowledge of the market. An alternative method of taking a stake in commercial real estate is buying real estate investment trusts (REITs).
REITs are equities that are publicly traded on stock exchanges. They are pass-through entities and distribute 100% of their taxable income as dividends. Hence, REITs tend to have high dividend yields. As a result, the stock price of REITs can increase, adding to returns. But investors should know that the dividend tax rate of REITs is the same as regular income.
However, the unique structure of REITs adds risk to investors. REITs can be volatile and have poor returns during recessions. The sub-prime mortgage and the COVID-19 pandemic are examples of when REIT stock prices plummeted. REITs cut or suspended their dividends during the COVID-19 pandemic and the sub-prime mortgage crisis. As a result, investors relying on REITs for income were severely punished.
That said, REITs have had periods of high returns and outperformed corporate bonds, and provided diversification.
The fifth alternative investment in this list is commodities. Commodities are tangible assets. They can be bought and sold on exchanges, much like equities and bonds. Commodities are another alternative investment that is an inflation hedge. Their prices tend to rise during times of inflation. However, their prices can decline, too, as supply outstrips demand. Commodities include precious metals, crude oil, natural gas, corn, soybeans, coffee, sugar, soybeans, wheat, etc.
Most retail investors will not directly buy and sell commodities or commodity futures or options. Instead, they will probably buy and sell commodity exchange-traded funds (ETFs). ETFs have made it much easier for retail investors to participate in this part of the market.
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This post originally appeared on Savoteur.
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