4 Types of Alternative Investments To Consider in 2022
by Trey Finch
An alternative investment is an investment that is not stocks, bonds, or cash. Typically, alternative investments are managed to provide diversification, produce income, or grow in value over time. The idea is to provide investors with a high reward-to-risk ratio.
This article answers these questions about alternative investing:
- What are alternative investments?
- Can diversification into alternatives help safeguard your portfolio?
- How could you benefit from private equity investing?
- Which natural resources are increasingly in demand?
- Could commercial real estate provide steady income?
- Should you consider mutual or hedge funds?
Although alternative investments are more complicated and speculative than traditional investments, they can offer higher returns. If you are looking to diversify your investment portfolio, consider investing in one of the following.
1. Commercial Real Estate
Commercial real estate (CRE) is a great way to diversify your portfolio. While the market may be volatile, long-term returns for CRE are likely to be positive. Commercial real estate also provides a potential opportunity for income generation through rental payments or leasing out property space for businesses.
Real estate investing can help save money on capital gains taxes, as well. In most cases, when you sell an asset like stocks or bonds (depending on how long you held them), any profit from that sale would be taxed at 15% percent or higher. The tax rate depends on how much money was made during the sale process (and only applies if your income exceeds $38,000 per year).
However, there is an alternative to immediately paying high taxes on these types of sales: You simply buy something else, instead. The IRS code allows what are called 1031 exchanges. These involve selling one investment property, combined with the purchase of another, in order to defer the capital gains tax.
There are two significant advantages to doing this. The first is that passive investors often can defer their capital gains tax liability on the proceeds of the sale. The second advantage lies in the fact that you can keep collecting distributions. Your new preferred return gets based on your higher proceeds rather than your first investment.
2. Hedge Funds
- What is a hedge fund? A hedge fund is a type of investment fund that uses sophisticated investment strategies to try to deliver consistent returns while reducing the risk. These are not mutual funds, so they do not have to register with the Securities and Exchange Commission (SEC).
- How are hedge funds different from mutual funds? Mutual funds are registered with the SEC, which regulates them. Conversely, hedge funds are not required to disclose their holdings publicly. Therefore, if you invest in one, it is important for you to understand what you are getting into.
- What kind of investments do hedge funds make? It depends on their strategy and on how much money they are managing at any given time. Generally speaking, they can invest in stocks or other securities. They may also include options contracts or other derivatives (e.g. financial instruments that derive their value based on an underlying asset).
Infrastructure is, fundamentally, a long-term investment. However, it is also the kind of asset that can be hard to build and maintain. As time passes, infrastructure will play an increasingly important role in our economy—from funding roads, bridges, and airports to bankrolling ports and water treatment facilities.
For over 30 years now, Qatar has been building out its transportation infrastructure as a way of attracting foreign investment into its country—and it seems to be working. The Doha International Airport opened in 2014 with three runways stretching out over 6 kilometers (3.7 miles), making it one of the longest runways in the world.
As time goes on, we will need more and more of these types of investments in the United States, whether it be for energy production or transportation purposes.
4. Private Equity and Venture Capital
Private equity and venture capital are types of alternative investments that allow investors to put money into companies that are not publicly traded. It typically involves funding startups, but it can also be allocated toward established businesses with strong growth potential.
Private capital is not regulated by the SEC, so there are fewer restrictions on how money is invested. The upside of this is that it provides greater flexibility for both you and your investment advisor as you assess opportunities together. It can be a good way to diversify your portfolio.
At the same time, it may increase returns while still maintaining some level of liquidity. Private capital is not as liquid as publicly-traded securities (which can be sold at any time). Regardless, these investments may have higher returns than many traditional asset classes.
Diversify and Think Long-Term.
The key to success with alternative investments is knowing how to diversify. In today's world, most investors are exposed to the same risks, no matter who they bank with or which investment products they choose. This can make managing your level of risk by using traditional asset classes, alone extremely difficult.
Alternative investments can be a good way to vary your portfolio and reduce your overall risk, at the same time. Since they are not tied to the stock market or other traditional investments, they are potentially more profitable than traditional investments, as well.
If you are thinking about investing in alternative assets, yet feeling uncertain about where to start, reach out to TrustCore Financial Planning. We can help you identify your short- and long-term goals and strategize a plan that will maximize your returns on investments while minimizing risk.
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