We hear a lot these days about alternative investments. Wall Street firms regularly tout their expertise in these investments and try to convince us we need them in our portfolio.
How Alternative Investments Started
In the beginning, alternative investments were only available to what most would consider the wealthy. The SEC set the definition of the wealthy with their accredited investor definition. To be eligible to invest in these alternative investments, one has to have an income of at least $200,000 (individual) or $300,000 (joint) for the last two years.
Additionally, the rule states the investor expects that income to continue going forward. If they don’t meet the income requirement, accredited investors must have a net worth of at least $1,000,000 (exclusive of personal residence). Though that group is growing, it leaves out millions of people who could benefit from the diversification offered by this asset class.
One thing common in the early days of these investments was high fees. In the beginning, managers charged investors 2% of the amount invested plus 20% of profits.
Here's what that means.
If someone invested $100,000 in a fund, and the fund earned 10%, the total dollars paid by the investor would be $4,000 ($100k x 2% = $2,000 + ($10,000 x 20%) = $2,000). That means instead of making $10,000 on your $100,000 investment, you earn $6,000!
In other words, instead of a 10% return, you earn 6%. That’s a 40% drop in your profit!
Also, your money was not available to you until the project or fund was sold or closed, which typically is five years or more. Over the years, investors became wise to the scheme, as did other investment product producers. They introduced lower cost, more liquid alternative investments into the marketplace, and lowered the bar for investing.
Here are six investments you may not have considered – three for accredited investors, and three for everyone else.
What Are Alternative Investments?
Let's start with what most consider the traditional investment products – those would be stocks, bonds, and cash. Investors can put money in the U.S. and international markets in both stocks, bonds, and cash. Most investors access these products via mutual funds and exchange-traded funds (ETFs).
The most popular form of investing in these markets is via index funds which are funds that mirror the market. There are no fund managers picking which stocks to buy, when to buy them, and when to sell. Instead, in index funds, investors get all of the stocks in that index (like the S & P 500) at the same proportion each stock makes up in the indexes. Rather than trying to beat the market, investors take what the market offers. It's a very inexpensive and easy way to invest.
Alternative investments, on the other hand, are not mutual funds, ETFs, or index funds. Instead, the funds have a management team and invest in things that are different from the stock and bond markets.
They include offerings like private equity, real estate, hedge funds, venture capital, managed futures, and derivative products. Many of you have heard these names thrown in the financial press. In addition to high fees, as mentioned earlier, many alternative investments have high minimum initial investments.
Crowdfunding – The Game Changer
For the reasons mentioned above, innovation has entered the alternative investment arena. As a result, companies began developing investments with lower fees and smaller minimum investments. They made these accessible to non-accredited investors. These innovative investments are a game-changer for the everyday investor.
Crowdfunded real estate investment trusts are the primary vehicle for these investments. These newer funds register with the SEC as exempt funds, usually under the SEC's Regulation Crowdfunding.
Crowdfunding in real estate, like with individual or small business crowdfunding, allows smaller investors into an investment space that hasn't been available to them in the past. Other options come in the form of mutual funds (managed futures, commodities, long-short funds, etc.).
Alternative Investments For Everyone
Three investments available to non-accredited investors include Vinovest, DiversyFund, and Fundrise. The latter two are crowdfunded real estate funds as described in the last section.
Vinovest offers a unique alternative investment in assets; one would normally not consider an investment class. We're talking about fine wine.
The first thing to know about investing in fine wine is that it takes knowledge to understand how to choose the right wines. Vinovest has a team of sommeliers, who have undergone rigorous training over several years. Three of their four sommeliers have achieved the Master Sommelier title. That's the highest degree of recognition in the wine industry. These folks know their wine.
Wine selections come from their knowledge and a sophisticated algorithm their technical team developed — the result – is the best wines with the best chance of price appreciation.
You own the individual bottles. Vinovest will store and age the wine at their state-of-the-art facilities around the world. They guarantee the safety of your wine. The minimum investment is just $5,000.
Fundrise and DiversyFund
Crowdfunding offers a method of fundraising that can bypass Wall Street firms and big banks with their high rates and fees.
In crowdfunded real estate, non-accredited investors now have access to similar real estate investments that accredited investors have always enjoyed. Both FundRise and DiversyFund are crowdfunded real estate funds. Investors can invest in these funds with as little as $500.
Here's a summary of each.
Each name describes the goals of the fund. If you're looking for income, consider the Supplemental Income fund. If you want a mix of income and growth, go with the Balanced Investing Fund. Are you looking for capital appreciation? Choose the growth fund.
Contrary to Fundrise, DiversyFund is a reasonably new entrant in the field of crowdfunded real estate investing.
Unlike the Fundrise investment options, the team at DiversyFund focuses on growing investors' capital. They have a value add investment strategy when looking for properties. What that means is they look for multi-family properties (apartments, condos, etc.) that have positive cash flow (renters) in good neighborhoods.
The value-added in their property selection comes from finding properties that need some work. We're not talking about a complete redo. Instead, the building might need a new roof, updated bathrooms or kitchens, or maybe a fresh coat of paint. With the improvements, they can charge more rent when the leases expire, and new tenants come on board.
Alternative Investments For Accredited Investors
What follows are three recommendations for those that meet the criteria of the accredited investor. These offerings have much lower minimum investments and fees. Two are crowdfunded offerings. The other is not.
Have you ever thought about investing in farmland? Did you not pursue that thought because you didn't know you had enough money or didn't know enough about it? If either of those describes you, you're going to want to learn about FarmTogether.
FarmTogether offers a low-cost investment opportunity that allows investors to own real land. Real land is less subject to inflation and more stable than many other investments.
Why? For one thing, the land is in limited supply. The law of supply and demand means it's likely to appreciate.
For those looking for cash flow, they offer that as well. The typical investments range from $10,000 – $50,000 per transaction. That $10,000 number is much more accessible than many of these types of offerings. And there are precious few funds that offer investment in farmland with cash flow.
YieldStreet is a fixed-income alternative investment. The team focuses on investments in litigation finance, real estate, and consumer and commercial financing, to name a few.
Getting into these types of alternative fixed income areas has typically been limited to hedge funds and other institutional investors. Accredited investors can now access these alternatives with Yieldstreet. They have the experience and expertise you want.
They have multiple offerings from which investors can choose. The minimum and maximum investment depend on the offering chosen. The minimum investment is usually $10,000. Once again, that is much lower than many alternative investments.
PeerStreet is another alternative investment in the real estate space. Rather than buying properties, the team at PeerStreet invests in loans backed by real estate. The quality of the loans is directly related to the quality of the real estate backing the loans.
The returns for loan investments are above average. The LTV (loan to value) of the properties shows they are not heavily leveraged, and the terms are relatively short. Like many of the investments we highlight here, PeerStreet has a low minimum investment of only $1,000 per loan.
Finding Other Alternative Investments
When it comes to investing, there are numerous options from which to choose. The problem comes in knowing where to look for the options. MoneyMade has you covered.
What is MoneyMade?
“It's a discovery engine built to help you find and compare all types of investment opportunities, spanning from alternative investment platforms through to Robo Investing.”
And it's super simple to use. Just enter the criteria of the investment you're looking for and let MoneyMade do the rest.
Alternative investments are no longer the exclusive investments for the uber-wealthy. Competition from mutual funds, and, more recently, from the crowdfunded investment arena have brought costs and minimum investments way down. That's not so good for the Wall Street product producers. But it's great for consumers.
The six investments we highlight are, by no means, meant to be the cure-all be-all for alternative investments. Before doing any investing, you should know why you're investing. Know what you want your investments to do for you. Once you get those foundational questions answered, you can take the time to investigate the best investments to help you achieve those goals.
Whether you're a seasoned investor or a DIYer who is looking for alternatives to traditional stocks and bonds, the six investments highlighted here are worthy of consideration. If none of those make sense, head over to MoneyMade and let them help you find what you're looking for.
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Featured Image Credit: Depositphotos.
Marjolein is the founder of Radical FIRE. She has a finance and economics background with a master’s in Finance. Radical FIRE is a personal finance blog that helps you live your dream life through making more money and investing. We want you to reach your financial goals and have fun while doing it!