High-net-worth, young investors tend to prefer alternatives to traditional stock and bond investments. This isn’t strange; market volatility drives younger investors towards alternatives, especially for portfolio diversification and high upside. But is there a list of alternative investments that we can take a look at before making a decision?
While the popularity of alternative investments can surge during periods of market turbulence, these investments have existed long before the recent market upheavals. They are not merely a reaction to a volatile market but are part of broader strategies for diversification, uncorrelated returns, and sometimes higher yields.
Alternative investments represent a wide range of asset classes beyond traditional stocks, bonds, or cash. They can reduce portfolio risk and provide opportunities for substantial returns.
Private market assets grew to $13.1 trillion in 2023, with a consistent growth of nearly 20% per year since 2018. This confirms that alternative investments are becoming more popular as the years go by.
To avoid confusion and embrace practical examples, let’s examine an extensive list of alternative investments, their performance, and their associated risks. This will help you clarify your investment ideas and position yourself more confidently to start building your portfolio with the best investment options for your financial goals.
An Analysis of the Different Types of Alternative Investments
There is a clear growing trend and interest in alternative investments among high-net-worth individuals, entrepreneurs, and investors. The main reasons are a desire to achieve higher yields, avoid market volatility, and achieve higher portfolio diversification to mitigate risks.
Recent market fluctuations, such as those seen in 2022, have increased the correlation between stocks and bonds. This means both assets may experience similar performance trends, reducing the effectiveness of diversification via bonds. Moreover, private companies have shown great performance, attractive enough for some investors to temporarily abandon traditional investments.
Apart from this, banks have been retrenching from loans to SMEs (small and medium enterprises), creating a financing gap. Alternative investments can fill this gap by providing capital to these businesses, presenting opportunities for investors to support growth in this segment of the economy while potentially earning higher returns compared to traditional investments.
Here’s a list of alternative investments to help you differentiate them and understand their advantages and disadvantages. Let’s dive in.
1. Private Equity
Private equity involves directly investing in private companies or buyouts of public companies. This type of investment is typically divided into three main categories: venture capital, growth capital, and buyouts.
Venture capital funds invest in early-stage companies with high growth potential; growth capital funds focus on more mature companies looking to expand or restructure, while buyout funds target established companies, aiming to improve their operations and profitability.
Private equity has shown strong historical performance, producing an average annual return of 10.48% over the 20-year period ending in 2020. This outperformed the S&P500 and the Russell 2000, two famously public stock markets.
However, these investments come with high risks, illiquidity, and long lock-up periods. Typically, the long investment horizons are from 5 to 10 years.
If you are interested in long-term investments to achieve higher returns, this is a great model that, despite economic uncertainties, continues to attract investors.
2. Real Estate
Real estate is probably the oldest and most popular type of alternative investment. It can include residential properties, such as homes or apartments to rent out or sell, that can provide rental income and capital appreciation; commercial properties, including office buildings, retail spaces, or industrial properties, which typically offer higher rental yields than residential properties but come with higher management costs and risks.
Some people choose to invest in direct ownership of properties or indirect investment through real estate investment trusts (REITs). These companies own, operate, or finance income-producing real estate across different property sectors. Publicly traded REITs offer liquidity similar to stocks.
The global commercial real estate market was valued at $37 trillion in 2023, with the North American region having the largest market size, valued at over $12 trillion.
In general, real estate investments provide steady income through rentals and potential capital appreciation. They can act as a hedge against inflation and offer diversification benefits. Still, you also have no note that real estate is subject to market cycles, property-specific risks, and legal and local considerations and requires substantial capital and management.
If you are looking for a long-term investment with a more stable income, real estate can be a good option. Just know that there are brick-and-mortar responsibilities you will have to consider and manage.
3. Commodities
Commodities include physical assets like gold, silver, oil, natural gas, or agricultural products. They are raw materials used to make consumer goods. Commodities can be invested in through direct ownership, futures contracts, or commodity-focused mutual funds and ETFs.
Many of these assets, like gold and silver, are popular investments during times of economic uncertainty. Physical gold, for example, acts as a hedge against inflation and currency devaluation. Numbers show that in 2023, the average return on gold was 13.1%.
Some of the pros of investing in commodities include the potential for short-term profits and a hedge against inflation, for they tend to rise during high inflation, protecting purchasing power. On the other hand, despite being an alternative currency, they suffer from high volatility.
Commodities are unpredictable due to factors like weather, geopolitics, and global economic outlook. Plus, they don’t generate regular income like real estate unless sold for profit.
4. Collectibles
Collectibles are tangible assets like art, antiques, rare wines, stamps, or luxury cars, among other vast categories. The investors interested in this asset have diverse profiles and motives: passion, social recognition, legacy creation, or investment.
As ancient as real estate, collectibles are alternative investments great for diversifying your portfolio while enjoying personal passions. With pieces like coins, classic automobiles, or antique furniture, we have to pay attention to the value of each collectible. This can be determined by supply and demand, condition, rarity, authenticity, origin, or appeal.
An individual investing in collectibles enjoys not only personal satisfaction but also building social networks, low correlation from portfolio diversification and potential financial returns for appreciation over time. The collectibles market was estimated at $492 billion, with an annual growth of 9.2% in 2024.
However, as with any other alternative investments, there are risks, and in collectibles, they can be high. The price volatility due to lack of information or standards can be a downturn. Moreover, these are illiquid assets because there’s a high difficulty in finding buyers in such a reserved niche. Handling, storing, transporting, marketing, and insurance can also be expensive. Collectibles need to have maintenance and sometimes restoration.
If you have specialized knowledge and are interested in tangible assets that can appreciate significantly, investing in collectibles can be a rewarding experience.
5. Cryptocurrencies
Cryptocurrencies like Bitcoin, Ethereum, and other digital assets have emerged as a new asset class. These decentralized currencies operate on blockchain technology and offer high potential returns but come with significant volatility and regulatory risks.
Bitcoin’s price, for example, has seen constant rises and falls, making it a high-risk, high-reward investment. Bitcoin and other cryptocurrencies have attracted Gen-Z and millennial investors due to their low correlation to public equities and the potential to improve both portfolio returns and diversification. It’s recommended to start with small allocations (approximately 5%) to maximize risk-adjusted returns.
Adding crypto increases portfolio risk but may improve the expected total return. As an investor, you should always consider personal circumstances and financial goals before investing. You should also note that cryptocurrencies, apart from being volatile, are speculative and involve risks like scams, hacks, and market manipulation.
It’s recommended that you consider risks like user errors, regulatory changes, counterparty failures, management issues, and programming bugs.
So, if you’re ready to dive into this tech adventure, this might be another valuable asset that you can add to your portfolio as well.
6. Private Debt
Post 2008-09 financial crisis, middle-market businesses needed capital, but banks, hampered by regulations, couldn’t offer flexible loans. Private debt investing emerged as an alternative, providing more accommodating loans. The economic downturn accelerated the growth of private debt as a formidable asset class.
Private debt includes any debt accumulated by private businesses and individuals. This can be credit card debt, corporate bonds, business loans, or personal loans, but predominantly involves alternative financial institutions making loans to private companies.
Private debt comprises 10-15% of total assets managed by private investors. As we mentioned somewhere above, banks remain hesitant to lend to SMEs due to new regulations. This led to significant investor interest in private debt, with contributions growing from $60 billion in 2008 to $812 in 2019.
For investors, private debt can be an attractive option since it reduces credit risks and provides protection against rising interest rates. It’s also more flexible and easy to manage compared to private equity funds.
However, private debt is more expensive than a bank loan. The firms must ensure a satisfactory return for their limited partner investors. In the current economic climate, risk-averse attitudes have made business owners more hesitant to incur such expensive debt.
7. Online Businesses
Investing in online businesses involves acquiring or funding digital companies such as e-commerce stores, SaaS (Software as a Service) companies, and content websites. This investment can be made directly or through platforms like WebStreet that offer fractional ownership.
E-commerce stores like Shopify stores or Amazon FBA businesses that sell products or services online are part of a rapidly growing sector and market with significant revenue potential. Revenue in the e-commerce market is projected to reach $4,117 billion in 2024.
Not just that, SaaS companies—businesses that provide software solutions on a subscription basis—such as Slack or Dropbox can achieve high margins and recurring revenue streams. The top 10% of SaaS startups experience monthly growth rates of 10-17% in their early stages. After reaching the $3 million ARR milestone, their growth rate stabilizes to around 6-7% per month.
Investing in online businesses offers high scalability due to the potential growth that digital businesses can offer quickly and efficiently compared to brick-and-mortar enterprises. Moreover, they offer global reach by not being confined by geographic boundaries, lowering overhead costs, improving profit margins, and providing flexibility for more dynamic management and adaptation to market changes.
However, this type of investment is not aimed at investors who are not accredited or are at the beginning of their investment journey. Before investing, you should know your risk tolerance and consider your financial situation.
Additionally, these passive investments have medium liquidity. You would need to be sure that you are willing to let your money sleep for a few years, but knowing you can expect projected returns of 20% annually over the investment round cycle (4-6 years). As Mellody Hobson said, “The biggest risk of all is not taking one.“
So, if you are looking for a passive high-cash-flow return investment, online businesses can be a highly rewarding option.
8. Farmland
Farmland investments involve purchasing agricultural land to generate income from crop sales or livestock or leasing the land to ranchers or farmers. This type of investment can be highly stable and rewarding, offering several benefits, such as long-term appreciation or a hedge against inflation. Although they are also highly illiquid, they can take a long time to sell.
Farmland is a historically solid return investment, with an average annual return of 11.5% since 1991. Additionally, farmland values have risen by 6.1% annually over the last 50 years. Two main reasons to consider this investment for your portfolio.
True to its alternative investment condition, farmland offers low correlation and, hence, low volatility compared to other asset classes like U.S. treasury bonds, the S&P 500, gold, and REITs.
However, there is also a potential decline in land prices, especially if interest rates increase or crop prices drop. If you buy land now and its value decreases, you could lose money when you decide to sell it later.
Apart from this, farmland shares some of the same drawbacks as real estate because of its physical condition. Owning land means your money is tied up in that land, you have to pay property taxes, and you have to stay informed about legal and local regulations like zoning laws and environmental restrictions.
Additionally, you may face unexpected expenses for repairs or improvements to keep the land productive and compliant with regulations. Agricultural risks such as drought, pests, and diseases will oblige you to stay ahead of agricultural practices and market trends.
9. Peer-to-Peer (P2P) Lending
Peer-to-peer (P2P) lending involves lending money directly to individuals via platforms that match lenders with borrowers. This allows investors to buy a stream of payments over time and receive the face value of the loan at its due date.
There are some important factors to consider; borrowers may fail to repay interest or principal, resulting in potential loss. Market movements are also highly considered; economic downturns can affect borrowers’ ability to repay loans. Plus, P2P loans suffer from low liquidity and may not be easily sold or converted to cash without a loss in value.
However, they do offer regular, steady income and a high potential for returns. P2P lending can offer higher interest rates than traditional savings accounts or bonds. Plus, it’s a good option for portfolio diversification. Just know that you have to be careful about the low reliability of the P2P platform itself, which can be a risk if you’re not properly informed.
If you are seeking high potential returns and a steady income stream and are comfortable with the risks of borrower default and platform reliability, P2P lending could be the right investment for you.
Visit our insights page to learn more about how to diversify your portfolio with online businesses, or follow along as we acquire them, manage them, and then sell them.
How WebStreet Provides Access To Alternative Investments
WebStreet is democratizing access to alternative investments through an innovative Micro PE model. It enables accredited investors to own fractional pieces of multiple online businesses with a high potential for scalability and profitability.
At WebStreet, we understand the power of alternative investments; therefore, we offer different benefits and opportunities for you to achieve your financial goals in a more decentralized and democratized manner, ensuring higher returns and expanded opportunities.
WebStreet’s micro-private equity model focuses on investing in online SMEs (small to medium-sized enterprises) with significant growth potential. Unlike traditional private equity, which targets larger businesses, micro-private equity deals involve smaller privately-held companies with annual revenues up to $5 million and operate at a more intimate and personalized level.
The strategy is a buy, grow & sell model, and the process is very straightforward:
- Asset pooling: Micro PE funds gather resources from multiple investors to create a large pool of capital. This pooled capital is then used to invest in various small businesses, spreading risk across multiple investments and increasing the fund’s overall potential for returns.
- Portfolio diversification: These funds invest in a wide range of small businesses across different sectors, all revolving around modern online businesses like Amazon FBA (Fulfillment by Amazon), Kindle Direct Publishing, and Software as a Service (SaaS). This diversification helps mitigate risks and capture growth opportunities.
- Buy, grow & sell: This strategy involves buying small businesses, enhancing their value through strategic improvements, and eventually selling them for a profit. It’s a process that aims to create value through the active management of seasoned portfolio managers (so you don’t have to be involved day-to-day) and operational enhancements.
After reviewing the extensive list of alternative investments, it’s fair to say that online businesses stand out from other alternative assets in terms of profitability and predictability.
After the pandemic in 2020, the online presence became essential for business survival and growth. They built and maintained customer relationships effectively, ensuring that, by 2040, 95% of purchases are expected to be made online, according to Nasdaq.
Industries like B2B software, search engines, e-commerce websites, and multimedia services have skyrocketed in the online world, increasing investment opportunities and profitability. Proven success and market impact are two key factors that confirm that these models are worth investing in.
For example, Upwork, a freelancer platform offering high-demand services, had revenue of $689 million in 2023; mobile apps are projected to generate $935 billion in 2024, and the global SaaS market is projected to reach $317 billion by the end of 2024, up from $273 billion in 2023.
Moreover, the online condition of these businesses allows you to leverage not only access to the modern technology industry but also cross borders due to its global performance, going beyond the US market limits.
Alternative investment platforms like WebStreet are gaining tremendous popularity. Why? Because they allow accredited investors to diversify their portfolios, achieve higher returns, and do it all passively. For high-net-worth individuals and executive entrepreneurs, this is highly valuable. They can continue their entrepreneurial ventures while knowing they are making big money with these investment strategies.
This is possible because WebStreet has a meticulous vetting process to find seasoned portfolio managers with proven track records in managing and scaling online businesses. This way, WebStreet builds a bridge between investors and portfolio managers, ensuring that their interests are aligned to achieve great results.
Overall, WebStreet’s global reach and accessibility to online business deals set us apart, offering both investors and portfolio managers a broad spectrum of investment opportunities.
The democratization of access to financial markets, allowing investors to participate easily and passively in this arena, creates wonderful opportunities for them to achieve their financial objectives strategically according to their goals.
How To Use This List of Alternative Investments
This list of alternative investments provides many different options that go beyond traditional stocks, bonds, and cash investments.
Identifying the right alternative investments requires understanding your financial goals, risk tolerance, and investment horizon. Here’s how you can use this list to make informed decisions:
- Assess your goals: Determine if you seek long-term capital appreciation, steady income, or a combination. This will help narrow down suitable investment options.
- Evaluate your risk tolerance: Different alternative investments offer different types and levels of risk. For instance, venture capital and cryptocurrencies offer high returns but with substantial volatility. Conversely, real estate provides more stable returns with lower risk. Online businesses shine here because even though they have a high-risk-high-return performance, WebStreet allows you to lower your risk by leaving the responsibility to top-tier portfolio managers. Disclaimer: this doesn’t mean that the investments aren’t risky. Every investment is, but you can be sure that there will be a lot more confidence on the way through this professional and transparent investment process.
- Consider your investment horizon: The time frame for your investment is crucial. If you prefer long-term holdings, real estate or farmland might be ideal. For quicker returns, cryptocurrencies could be a better option.
- Diversify your portfolio: Spread your investments across multiple asset classes to reduce risk and enhance potential returns. There is no discussion here. A well-diversified portfolio might include a mix of real estate, online businesses, and commodities.
- Leverage professional expertise: Platforms like WebStreet offer access to professional portfolio managers who can handle the complexities of investing in online businesses. This allows you to benefit from their expertise while focusing on your entrepreneurial ventures.
Conclusion
Alternative investments offer a compelling avenue for high-net-worth, tech-savvy entrepreneurs to diversify their portfolios and generate passive income.
Among the extensive list of alternative investments, fractional ownership in online businesses through platforms like WebStreet is a particularly attractive choice. It allows you to participate in a transparent and straightforward process.
Combining its proven track record and professional management, it is an excellent option for accredited investors seeking higher returns without the exhaustive task of day-to-day management.
As you explore this complete list of alternative investments, always remember that diversification and professional expertise are key to maximizing returns and minimizing risk.
Click Here To Start Your Journey With WebStreet Today. Unlock the door to diversified, alternative investments and learn more about investing in online businesses by reading our insights.
