Investment Alternatives Outside of the Stock Market

At any stage of your financial maturity you have the ability to pursue investments that lie outside of publicly traded companies in various stock exchanges. However, once you’ve reached the stage of financial abundance, you’re more likely to consider a range of alternative investments. Some of these, like real estate, are quite common. Others, like private equity or collectibles, are less common.

This article covers some specific alternative investment options. However, the primary aim of this article is not to cover alternative investment opportunities in detail. Rather, the focus is providing a framework for how and when to consider alternative investments so you can be thoughtful about your approach.

Considerations for Alternative Investment

1. Start with Why

Start with understanding your motivation. Put simply, you should understand why you are interested in alternative investments in the first place. For example, are you looking for the thrill of the chance for outsized returns, a hedge against major economic headwinds, a hobby, or serving an underserved market? Perhaps your goal is as simple as carving out a part of your portfolio for a specific purpose, like purchasing a vacation property to enjoy and eventually pass on to your heirs.Whatever your reasons, having a clear-eyed picture of your ‘why’ will inform how the rest of your strategy takes shape.

2. Consider Your Balance

Next, it’s good to review your entire investment portfolio and consider what percentage you want in ‘alternative’ assets. Since investing in alternative investments can often be more speculative and driven by emotion, it’s good to set some personal guidelines. If your goal is to have no more than 5%, 10% or 20% allocated to alternative investments while the rest remain in a more traditional stock and bond portfolio, make that clear from the outset.

Additionally, consider if your investments will be one-off purchases or if you plan to pursue a more intentional, longer-term strategy. For example, you may be interested in collecting and investing in fine art. If you’re pursuing that purely as a hobby, maybe making only a one off purchase here or there, you would buy exactly what you want with little regard to the purchase from an investment standpoint. However, if you plan to develop an area of expertise and build a significant collection that you hope will appreciate, you may want to more carefully consider your purchases.

3. Get Educated

Finally, consider how you will educate yourself about the space you plan to invest in. Even if you already have a fair amount of expertise in your alternative investment area, it’s worth seeking out additional resources.For example, Imagine a realtor. Any good realtor will know a lot about real estate and will have helped many clients buy and sell homes. But purchasing an investment property may be a new experience with a host of different things to consider. Considering needs for property maintenance and management, doing a detailed financial analysis of whether or not the property makes sense from a pure money-making perspective, and more are all areas the realtor may need to get more familiar with.

No matter your alternative investment area, there are sure to be numerous books, podcasts, local experts, or even classes or seminars that cover the topic. Make sure to leverage these resources before diving in.

Common Alternative Investments

The list below are just a few alternative investments among a wide array that exist outside a public stock market. We’ve chosen them because they differ from each other in obvious ways but as a group, they represent a wide range of considerations that would apply to many alternative investments.

Real Estate

Investing in real estate is one of the most common alternative investment strategies. Many enjoy the fact that real estate is a tangible asset. Investing in real estate can be a pure financial play, or the property can be used for personal enjoyment. 

Real estate has the potential to generate returns in three ways. First, you can leverage rental income to pay down the mortgage and build equity. Second, any rent above and beyond the principal, interest, insurance, taxes, and ongoing maintenance costs, can provide a regular stream of monthly income. Finally, you have the potential to generate returns through capital appreciation in the value of the property over time. As your property’s value appreciates, you are building additional equity. In the right markets, this has proven to be quite valuable to homeowners over longer periods of time.

When considering investing in real estate, you’ll want to do your research on the location. This means considering the neighborhood, rental rates in the area, environmental factors and more. You’ll also need to consider how the property will be managed. Will you hire a management company or do it yourself? Will you perform maintenance or contract it out? Do you plan to own the properties for longer durations or are you focusing on renovating and “flipping” properties?

There’s a lot to consider before investing in real estate and it’s important to do your research. While many have done very well with this type of alternative investment, others have lost significant sums unexpectedly. But with solid planning and research, investing in real estate can be a worthwhile addition to your overall investment strategy.

Angel Investing, Venture Capital, & Private Equity

Whether you’re angel investing, investing in venture capital, or private equity, these are all different flavors of the same basic concept: you’re investing in privately owned companies that are not publicly traded on a stock exchange.

Angel Investing

This typically involves the least amount of money upfront, typically between $10k – $500k. Angel investors are often investing in very small, unproven companies. In fact, the earliest angel investors may be investing in a company still looking to hire its first employees.

Not surprisingly, the risks in angel investing can be very high. There’s a good chance your investment will be worth nothing when all is said and done. Often, angel investors will invest in multiple companies with the hope that a few or even just one go on to be successful.

Despite the risks, the potential returns from a successful angel investment are significant. As an angel investor, you’re typically able to acquire a relatively large share of a company for the price. As new investment comes in, your percentage ownership may change over time. However, the price you paid for your initial shares will be quite favorable. As they say, the early bird gets the worm and this is certainly true of angel investing.

Venture Capital

VC investing is a bit harder to get into than angel investing. It usually requires an investment of at least $1M to get started and you will typically need to become a partner at a Venture Capital fund. To do this you’ll either need to have a successful history of angel investing, be an accredited investor, or both.

Venture capital investing is a high risk, high reward investing environment. However, due to the larger size of a venture capital fund and the fact that investments are made in companies with a longer track record, venture capital investments are typically viewed as less risky and less rewarding than angel investments.

Private Equity

Private Equity is the broader category of investing that includes Venture Capital investing. These investors are typically known as “retail investors.” Retail investors invest through a private equity firm who will invest funds in companies on behalf of its investors. While the financial minimum bar for investing in private equity can be as high as $25M, according to Harvard Business Review, some firms have much lower minimums (possibly as low as $25k). Typically, investing with a private equity firm will be less risky than venture capital or angel investing.

Regardless of which form of private investing you’re interested in, it’s important to know there is typically a long time horizon before returns may be recognized. A five to ten year time horizon is typical. It’s always important to do your research, find a category and a firm (if applicable) that interests you and fits your style, and manage your risk appropriately. 

Collectibles

If you’ve ever watched The Antiques Roadshow, you know it’s possible to make a good return on something rare and old. But if you want to invest in collectibles beyond a hobby, it takes a lot more than combing through a few garage sale items and selling what you find for thousands more at auction. To invest in collectibles, you need to be a true expert.

Collectibles can be defined as anything that either appreciates over time or that you already know someone else would value more at auction if sold today. Most commonly, collectibles include:

• Antiques
• Art
• Cars
• Coins
• Jewelry 
• Sports cards and related memorabilia
• Stamps
• Wine

In addition to expertise, major considerations for investing in collectibles include understanding how to physically store and care for your items, recognizing that they are illiquid assets until sold, can have highly volatile valuations, and may have a limited market of potential buyers. All that said, there are many worse ways to spend your time than researching and collecting within the category of your choice. If you find it interesting there’s no reason you can’t try your hand at collectibles investing.

Final Thoughts

The alternative investments listed above are just the tip of the iceberg. Cryptocurrencies, physical commodities, direct lending, and more are also available investing options. What matters most is that you are thoughtful about why you are pursuing these strategies, have a clear idea of your goals, and are educated in the investment areas of choice. Using this framework you are more likely to maximize your success (however you define that) and mitigate risk and the possible impacts of unwanted outcomes. 

Remember, just because you can pursue alternative investment strategies, doesn’t mean you must. If you’ve reached the stage of financial Abundance through mastering financial fundamentals that are commonplace, there’s no reason you have to abandon that now. But there’s also nothing wrong with experimenting with a few alternative investment strategies if that’s something that interests you.