When people think of investing, they often focus on traditional securities like stocks and bonds, which, along with cash, form the core of many retirement portfolios. However, there’s also a category of investments known as alternative investments, which has gained considerable popularity in recent years.

Alternative investments encompass a range of assets beyond the usual stocks and bonds, and they can play a key role in diversifying your investment portfolio. Here’s a brief overview of alternative investments and how they can enhance your portfolio’s diversity.

What are alternative investments and how do they work?

Alternative investments diverge from traditional categories like stocks, bonds, and cash. They encompass a variety of assets, including real estate, commodities, private equity, and hedge funds.

These investments generally exhibit the following characteristics:

  • Low Liquidity: They are not as easily sold or converted to cash.
  • Higher Fees: They often come with higher expenses compared to traditional investments.
  • Complex Structure: Some alternatives are intricate and may be available only to accredited investors.
  • Less Regulation: Although they face some regulatory oversight, they are less regulated compared to traditional investments like mutual funds or ETFs.
  • Potentially Low Correlation: They may have little correlation with traditional assets, making them a useful tool for diversifying portfolios.

Popular types of alternative investments

Real estate

Real estate is a major asset class that enables investors to profit from owning physical properties or securities such as Real Estate Investment Trusts (REITs). Real estate investments can provide income through rental payments and capital gains if property values increase. Investors can access real estate with relatively low costs through REITs or real estate-focused ETFs, or by owning residential or rental properties directly.

Commodities

Commodities encompass natural resources like oil, natural gas, gold, and agricultural products. Their prices often fluctuate based on supply and demand dynamics. Investors can gain exposure to commodities via ETFs that track commodity performance, derivatives, or by directly holding the commodities themselves.

Private equity

Private equity involves investing in private companies or start-ups, often through venture capital. Unlike public stocks, these companies are not traded on stock exchanges. Private equity funds may provide strategic guidance and influence capital allocation decisions. Typically available only to institutional and high-net-worth investors, private equity funds can carry high fees but may outperform traditional stock market indexes.

Hedge funds

Hedge funds invest in both traditional and alternative assets, employing strategies like shorting or using derivatives. They often follow a “2 and 20” fee structure, charging a 2% annual management fee plus 20% of the fund’s profits. Hedge funds are accessible primarily to institutional and high-net-worth investors.

Cryptocurrency

Digital currencies such as Bitcoin and Ethereum are considered alternative investments due to their deviation from traditional asset classes. Cryptocurrencies can be highly volatile and have a limited historical track record, making their diversification benefits uncertain. Previously traded mainly on crypto exchanges with high fees, Bitcoin and Ethereum are now available in ETF form.

Sports memorabilia and collectibles

Sports memorabilia and collectibles offer another alternative investment opportunity with potential for significant returns, especially if you select valuable items. Trading cards, for instance, can appreciate dramatically if the athlete featured achieves greatness or if the card is rare and in mint condition. Similarly, signed jerseys and game-used equipment may also increase in value over time. If you’re interested in sports investments, you might also explore opportunities to invest in a professional sports team.

Art

Art investment has long attracted high-net-worth individuals, with potential for substantial returns. Investing in the work of emerging artists may yield significant profits as their careers progress, while classic pieces from renowned artists often retain their value. Unlike many investments, art doesn’t generate cash flow; its value is determined by what buyers are willing to pay, which can fluctuate based on market trends and the artist’s reputation.

Stamps

Stamp collecting is a time-honored pursuit that can be lucrative, particularly for rare or unique stamps. For instance, legendary bond investor Bill Gross auctioned his world-class stamp collection for $19.2 million in 2024, including a rare 1868 One-cent “Z” Grill stamp that sold for $4.3 million alone.

Coins

Coins are another collectible with investment potential, especially those of historical significance or rarity. Valuable coins can fetch millions at auction and often date back centuries. An example is the 1794 Flowing Hair Silver Dollar, believed to be the first silver dollar minted by the U.S., which sold for $12 million in 2022.

In Conclusion

Alternative investments can help diversify your portfolio by adding assets with low correlation to traditional investments like stocks and bonds, which means they often move independently of these assets. However, they typically come with low liquidity and high fees, so they should only constitute a small portion of your overall investment strategy.