What do 81% of people with over $1 million in assets have in common? Increasingly, they’re shifting focus from traditional stocks to alternative investments. On average, those wealthy investors are putting 26% of their assets toward alternative investments, up from 22% just a few years ago.
But alternative investments aren’t just for the ultra-rich. Often, we assume alternative investments are only for accredited investors, or investors with an income over $200K, or net worth over $1 million. However, there are many alternative investments that don’t require you to be accredited to participate.
This post will give you the low-down on alternative investments and how they can help you build wealth. We’ll cover what types of investments fall under the alternative investment umbrella, and go over four reasons you may want to consider incorporating them to diversify your portfolio.
What Are Alternative Investments?
Before we cover the advantages of alternative investments, we should first answer one important question: What is an alternative investment?
In short, an alternative investment is any investment that isn’t a stock, a bond, or cash. Alternative investments are usually private investments or assets, compared with traditional investments which are generally publicly traded.
You may be thinking, that is awfully broad, and you’re right! Let’s break things down a little further. We can divide alternative assets into three main categories. Primary assets, niche assets, and next-gen assets
Primary alternative assets are some of the most stable and well-known options for alternative investments. For example, if you purchase a home instead of renting, you have just invested in an alternative asset—real estate. Of course, you can also invest in real estate for the purpose of resale or rental.
Another example of a primary alternative investment is investing in a business venture. Say you have a friend with a startup or a small business opens in your area. If you choose to invest in that venture before it’s publicly traded, you’re making an alternative investment.
Franchise businesses are another type of primary asset. Franchise investment refers to ownership of a location (or multiple locations) of a larger chain. For example, you can open a franchise of McDonald’s. This type of investment is generally very active: think of it as a marriage between investing and starting a business.
The next category of alternative investments that we’ll discuss are niche assets. Niche assets are not as popular with newer investors as primary assets, but they can have high returns if you play your cards right.
Have you heard of AirBnB? Of course, you have. Purchasing a property for the purpose of turning it into a short-term rental (via VRBO, AirBnB, etc.) is an example of a niche asset.
Another niche asset you may want to consider is oil and gas. This type of investment can be risky, as oil and gas prices tend to be volatile, shifting massively depending on supply and demand. You may also want to consider associated regulatory risks if you decide to invest in oil and gas.
The last category of niche investments we’ll talk about here is collectibles. Do you have a penchant for fine wine, classic cars, or baseball cards? This might be the alternative investment category for you. Fine art, race horses, and even professional sports franchises all fall under this category as well. If you’re planning to dive into the deep end with collectible investing, ensure you’re knowledgeable about the collectible in question—you’re only likely to succeed if you understand deals more quickly, with less effort, and better than the rest of the population.
Last but not least, you may choose to invest in next-gen assets. Next-gen assets include cryptocurrency and NFTs.
Cryptocurrency refers to a currency that only exists virtually. Unlike cash, cryptocurrency isn’t regulated by any centralized authority or government. We won’t get too into the weeds here, but cryptocurrency is stored in a digital wallet and can be traded with other users, just like money. Cryptocurrency has been rising in popularity for years—last year, an NFL player even requested to be paid 100% in Bitcoin.
NFTs, or non-fungible tokens, are similar to cryptocurrency in that they too are virtual assets, but where crypto is similar to cash, NFTs are more similar to collectibles. You can purchase digital assets like artwork or memes as NFTs, similar to how you might purchase a painting, in hopes that it will increase in value over time.
Next-gen assets might be of particular interest to users looking to prepare for the future of the internet—the metaverse. If predictions about the metaverse come to fruition, digital assets could truly be the future.
Misconceptions About Alternative Investments
What’s ironic is, wealthy people will tell you that there is nothing “alternative” about alternative investments. If you’re looking to build massive, sustainable wealth, you’ll want to look at alternative assets as your primary target for investment opportunities.
A common misconception about alternative investments is that they aren’t for the average investor. Many people look at investment opportunities like apartment complexes or fine art and assume that type of investment is only available to the super-rich. This is untrue! There are avenues available to all investors interested in alternative investments, you just need to know where to look.
Tribevest firmly believes in offering everyone the opportunity to access high-value assets, and we’ve built our platform to support that belief. Using Tribevest, you can safely pool money with friends and family to access the alternative investments you’ve always wanted. But before we dive into the benefits of group investing, let’s discuss four ways alternative investments can level up your wealth-building efforts.
1. Receive Higher Returns
If you’re investing in something, it’s because you’re hoping to receive something in return, right? Of course!
Stocks and bonds can offer consistent, steady returns, but the average return for stocks hovers around 10%. That’s a good deal better than the return you’ll get letting your cash sit in a bank account, but still, if you’re looking for massive returns on your investment, publicly-traded stocks aren’t likely to provide that.
One reason for this is that the number of publicly-traded companies has been dropping for the past 20-30 years. Where it was once possible to get in with a company like Microsoft early and watch your stock value skyrocket over time, most companies today remain privately funded until they’re already big, stable, and done with explosive growth.
If you want an investment with a 100X return these days, you’ll need to turn your attention to alternative assets.
Not only do alternative assets have the potential for massive returns, but they also offer the opportunity for passive income. Imagine you have purchased a property for use as a short-term rental. The property itself is an asset that is growing in value over time, but the rental fees your tenants pay can supplement (or even replace, in time!) your regular income.
2. Diversify Your Portfolio
If you ask a financial adviser what it means to diversify your portfolio, they may tell you that you need to spread out your stock market investments among different industries. Put 20% toward technology, 20% toward retail, etc. At Tribevest, we view diversification a little differently.
For a portfolio to be truly diversified, it can’t rely solely on the success of the stock market for returns. It doesn’t matter how many industries you own stock in: If the market tanks, your entire portfolio will tank alongside it.
Investing in alternative assets will ensure that your financial future doesn’t live or die by the health of the stock market. Additionally, alternative assets tend to be less volatile than publicly-traded stocks. When the value of your asset isn’t constantly in flux, you’ll be able to earn more compounding interest more quickly, raising the value of your portfolio significantly over time.
3. Take Advantage of Tax Benefits
Remember receiving your first paycheck? If you’re like most people, you were probably surprised by the chunk of your income taken out for taxes.
If you’re looking to build more wealth without paying obscene taxes, alternative investments are the way to go. We’ll look at three main benefits here: Pass-through depreciation, capital gains tax, and Section 1031.
Pass-through depreciation is most relevant for alternative investments related to real estate. It refers to your ability to deduct the costs of keeping and improving your property from any taxable income you receive from that property.
For example, if you have a rental property, you can deduct advertising expenses, HOA dues, insurance costs, and more from the taxable income you gain from renting the property to tenants.
The main benefit of capital gains is that they are taxed at a lower rate than regular income. For example, income tax maxes out at a rate of 37%, whereas the maximum percentage you’ll pay in capital gains taxes is 20% regardless of income. As long as you’re holding onto alternative investments like property for longer than a year, you’ll be taxed at the long-term capital gains rate when you sell that property.
Capital gains tax rates are lower than income tax rates, but they’re still taxes—if you’re ready to switch up your investment properties, but you don’t want to pay those capital gains taxes, you may want to consider exploring Section 1031.
Under Section 1031, you can swap one investment property for another like-kind property without paying any capital gains tax on that sale. Generally, this type of exchange is conducted through a third party, and it can be an awesome advantage when it comes to adjusting your property holdings.
4. Experience True Ownership
When you buy stock, all you have to show for it is a piece of paper or a number of shares listed on a screen. There is no tangible asset you can point to. To be fair, you’ll find this same challenge with next-gen alternative investments like crypto, but for many alternative investments, purchasing an asset means owning something you can touch and hold.
When you invest in a rental property or rare artwork, your asset is more secure in some ways. This security comes from the tangible existence of your asset. If a company goes out of business, your stocks will be worthless. But, even if house prices plummet in the area where you own property, you still own the house and the land it sits on. This guarantees your investment will retain at least some value, regardless of what happens in the market.
Leverage Your Tribe to Access Alternative Investments
Stocks tend to be top of mind when we think of investing, but some experts recommend allocating at least 10-20% of your investing budget to alternative investments. With alternative investments, you can enjoy higher returns, tax benefits, and a diversified portfolio, all while experiencing what it’s like to own a valuable, tangible asset. The only catch is that, often, alternative investments can be on the pricier side.
At Tribevest, we believe that all asset classes should be available to all investors. That’s why we’ve made it our mission to make group investing as easy as possible. With our platform, you can pool capital with friends and family to access investment opportunities you might otherwise not be able to, like real estate, racehorses, NFTs, and more!