When most people think about investing, they immediately think of stocks and bonds because these are the most common and most familiar choices. In reality, there are countless types of assets you can put your money into.

Historically, investment options were limited by accessibility. To gain exposure to alternative investments, an investor usually needed to join a hedge fund which often required a minimum of one million dollars. As a result, most people stayed with traditional assets like stocks and bonds.

Today, technology has made alternative investments far more accessible. Many online platforms now allow individuals to invest easily in assets that were once reserved for institutions or high net worth individuals. These types of assets are called alternative investments.

This article explains what alternative investments are, why they can be valuable, and what to consider before investing.

What Are Alternative Investments

By definition, an alternative investment is any financial asset that is not a stock, bond, or cash. These assets are not traded on major exchanges such as the NASDAQ or the New York Stock Exchange.

Because the definition is broad, many different assets fall into this category. Examples include farmland, artwork, structured settlements, fine wine, and even film production.

In the past, these investments were mainly available to hedge funds, institutions, and wealthy individuals with the right connections. Now, online platforms collect funds from thousands of investors which lowers the minimum requirement. Instead of needing one million dollars, an individual might invest as little as ten thousand dollars or even less.

Why Should You Invest In Alternative Assets

There are two major reasons investors seek out alternative investments.

Diversification

We all know the saying that warns against putting all your eggs in one basket. Diversification means spreading your money across different assets so they do not all react the same way to a single event.

Most financial experts recommend diversifying across stocks, bonds, real estate, and alternative investments. The more diversified your portfolio is, the better it may handle market volatility.

Seeking Strong Returns

We are currently seeing record participation in the stock market thanks to commission free trading apps which have opened the door for millions of smaller investors. While this is positive, it raises concerns about overcrowding which may push prices too high.

When many people buy the same assets, prices rise. If enthusiasm grows too quickly, bubbles can form. A simple solution might seem to be bonds, but interest rates are at historic lows which means bond yields have also dropped. Many bond yields are not even keeping up with inflation.

This combination of crowded stock markets and low bond yields has pushed many investors to look elsewhere. Some alternative investments have even outperformed stocks. Farmland, for example, has returned an average of twelve point one percent annually over the last twenty years. Over that same time, the S and P five hundred returned nine point two percent.

Why Should You Not Invest

Alternative investments offer diversification and the potential for strong returns. However, they are not perfect. The biggest difference between traditional assets and alternative investments is liquidity.

Liquidity refers to how easily an asset can be converted into cash. Stocks and bonds are highly liquid because they trade on major exchanges and can be sold within seconds.

Alternative investments usually do not offer this level of liquidity. If you invest in an alternative asset such as farmland, you should be ready to hold the investment for the full duration.

Platforms offering these investments usually provide an expected timeline. For example, on AcreTrader you may need to commit to a three to ten year holding period depending on the investment. Some platforms offer secondary markets to sell shares, but many do not.

Interestingly, this illiquidity can be an advantage. It prevents panic selling during turbulent times. Many investors make impulsive decisions during market crashes but selling during a downturn is almost always a bad move. Illiquid investments can protect you from emotional decisions.

Final Thoughts

Alternative investments offer many benefits, but the lack of liquidity may be a deal breaker depending on your needs.

For investors who are comfortable with longer holding periods, these assets can be a valuable addition to a portfolio that goes beyond traditional stocks and bonds. As markets continue to evolve, it is becoming increasingly important to seek out new ways to diversify and pursue returns.

If you want to explore alternative investment opportunities available on AcreTrader today, you can visit the Current Offerings page to learn more.

To read more articles from Ryan Scribner, visit Farmland Riches.

Supplemental Information

The content above is intended for general educational purposes only and is not a comparison of investment products. Any performance mentioned is historical and not a guarantee of future results. All investments involve risk including the possible loss of principal. Diversification does not guarantee profit or prevent loss. Review your financial goals, risk tolerance, tax considerations, and liquidity needs before investing. Investment vehicles differ in fees, risks, and objectives. Alternative investments are speculative and not suitable for all investors.

Some links in this article lead to external websites that are independent from AcreTrader. These sites are not reviewed or endorsed by AcreTrader. Their terms and policies may be different from ours.