Pros of Alternative Investments

As mentioned briefly above, alternative investments carry a number of positive elements for why you should consider making them part of your overall strategy on how to build wealth. Read below to see the primary reasons for including alternative investments in your portfolio and also keep in mind the various details related to each alternative investment differ. Therefore, not all of these elements will apply in each situation.

→ Diversification

First and foremost, holding a diverse selection of assets decreases the likelihood of taking on asset-specific risk. Holding multiple types of assets reduces the possibility of exposing yourself to the risk of one investment adversely impacting your overall portfolio return. Many investors turn to alternatives as a way to create a more diverse portfolio rather than having everything wrapped up in stocks, bonds, and cash.

→ Higher Potential Expected Returns

Given the long-term nature of many alternative investments, their illiquidity offers a premium investors expect in exchange for losing immediate access to their funds. For the disciplined, long-term oriented investors, some alternative investments appear attractive simply because they offer higher expected returns which might not come from other investing strategies.

→ Not Correlated with the Stock or Bond Markets

Depending on the alternative investments considered, some do not have significant (if any) correlation with the stock or bond markets (at least directly). In other words, changes in the stock market should not directly affect the value of your alternative investment. Translation: alternatives can act as a valuable portfolio diversifier due to their potential for insulating your portfolio from day-to-day volatility during rough market conditions.

→ Tax Benefits

Alternatives vary with investment objective and return potential. Some provide income streams while others offer capital appreciation opportunities. Depending on the alternative considered, they may act as tax-advantaged investments worth examining in your evaluation. If you have uncertainty about their tax consequences, please consult a tax professional for advice related to your personal situation and the specific investments under consideration.

Cons of Alternative Investments

Now that we have examined the main reasons for why you would consider investing in alternatives, let’s also take a moment to address some of their drawbacks.

→ Risk of Loss

Every investment carries some level of associated risk. Alternative investments act no differently. Therefore, while the level of risk will vary from one investment to another, in general, alternative investments still carry risk.

Depending on the type of alternative asset, they may range in risk from conservative to aggressive. One other item to consider during your analysis are regulations or the lack thereof. While traditional investments like investing in index funds, stocks and bonds have deep markets and tightly-controlled rules and regulations (even something as risky as shorting stocks on Robinhood and Webull comes with strict rules and regulations), not all alternative investments come with such certainty.

As a result, rules and regulations will vary by investment and should factor into your risk evaluation. Investing in alternatives carries the risk of partial or complete loss in some instances.

→ Unfamiliar Assets and Risks

A major reason why alternative investments can carry more risk than more traditional investments stems from the fact that they tend to be less familiar to most investors.

As a general rule, you should avoid investing in anything you do not fully comprehend (e.g., credit default swaps).

Therefore, take time to conduct your own research into the asset before moving forward with an alternative investment. If you choose to invest without sufficient due diligence, you could potentially expose yourself to an undue amount of risk.

→ Tax Disadvantages / Complexity

Just as some alternative investments create potential for tax-advantaged investments, the same applies to the other side of the coin. Some alternatives offer tax disadvantages compared to other options available to you. As a result, you should consider speaking with a tax professional if you do not have certainty about the tax consequences of investing in an alternative investment.

→ Some Alternative Investments Require a High Minimum Investment

As with all investments, certain minimums could apply. Mutual funds, target date funds, and other common types of investment vehicles often present hurdles in the form of minimum initial contributions before gaining access to investing in their funds. While index funds on Robinhood or the best Robinhood alternatives do not require minimum investments (beyond affording the price of purchasing one share), alternatives present different rules in some cases.

Some platforms present minimum investment thresholds before allowing you to invest in their asset, platform or service. Despite these hurdles, some of the alternatives addressed later in this article do not require a lot of money to start investing. Options exist for everyone, but the more money you have, the more likely you are to have access to invest in more assets.

→ Some Alternative Investments Options are for High Net Worth Individuals Only

Some investments only allow access to accredited investors, or those meeting certain net worth or annual income thresholds. Therefore, some alternative investments are only open to high net worth individuals.

In broad strokes, two types of investors exist in the eyes of the U.S. regulators: accredited and non-accredited. From purely a numbers perspective, accredited investors have more investment options than non-accredited investors, all things being equal.

As a specific call out: a handful of these services mentioned below only allow access to accredited investors (or those people who meet one or both of the following criteria):

Earned income in excess of $200,000 (or $300,000 if married) for each of the last two years with reasonable expectations for that amount this year, OR

Have over $1,000,000 in net worth (with or without a spouse), excluding the equity in a primary residence

Again, the details of each investment will vary, but several investments covered in this article tend to only have access available to accredited investors. Therefore, this means only a small percentage of people will have access to pursue those investments.

→ Illiquid

Famed quantitative-focused investor Cliff Asness speaks highly of “liquid alts,” or those alternative investments readily convertible to cash within a reasonable period of time. In Asness’ view, a well-constructed portfolio which includes liquid alts can help investors diversify their portfolios and — eventually — reap long-term gains.

He argues for this strategy to work effectively, the alternative investments should have low correlation to traditional assets, such as stocks and bonds, which trade at expensive levels compared to historical valuations.

As a result, if you can find diversifying, positive expected return “liquid alts,” then you can materially improve your portfolio. Therefore, let’s take a look at some alternative investments which might diversify your portfolio.

1. Invest in Fine Wine with Vinovest

Buying expensive wines may be one of your favorite activities, but did you know it could make you money? As a tangible asset, wine has a low correlation with global equities and has less long-term market volatility than other investments.

Because wine comes from specific regions in finite quantities, the supply does not fluctuate much.

As people consume the wine, the supply diminishes and the demand increases. Simple Economics 101. As a result, this makes it an excellent alternative investment option.

Plus, as a worst-case scenario, you can drink your wine! This may sound tempting to buy your own wine, store it in your basement, and hope for the best.

However, if you really want to make a profit, there are benefits to using a company to build your wine investment portfolio, such as Vinovest. Fine wine dramatically outperformed several asset classes during the Great Recession and likely will during the COVID-19 bear market cycle.

The minimum balance for Vinovest is $1,000 and you pay a 2.85% annual fee to cover labor, storage, authenticity guarantee, portfolio rebalancing, and insurance. You can lower your annual fee to 2.5%, as well as get one-on-one expert guidance and extra rare wines, if your minimum balance is $50,000 or greater.

Consider the long-term potential growth in value of this investment and look more into the investment potential. You might find the lack of volatility and consistent returns as reasons for why fine wine investing might be one of the best investments for young adults.

To learn more about one of the companies democratizing wine investing, consider visiting the company’s site and reading our Vinovest review.