What Is Alternative Investing?
2020 showed us what market turbulence can do to our portfolios, and how a changing tide can lift—or sink—all ships. Interest rate slashes made bonds an unappealing way to safeguard stock and fund gains; both of which lost value precipitously only to regain months later.
What is alternative investing and what role can it play for you, though? If you’re like most investors, you’re looking for another place to put your money. Alternative investing can be just the thing your portfolio needs in this case. Alternatives help you diversify your portfolio and give you access to industry sectors and holdings that conventional markets can’t.
Alternative investing is a broad classification of financial opportunities that sit outside the market. This can include fine art and collectibles, more conventional alternatives like real estate and precious metals, and now even farmland. Picking the right alternative investing options for your portfolio depends largely on your risk tolerance and investment strategy, among other factors.
Here’s what you need to know about alternative investing before you get started.
What Alternative Investing Means for Your Portfolio
When you invest in alternatives, you’re providing yourself with several financial opportunities. Chiefly, alternatives help introduce diversification into your asset mix. With alternative investing, you’re getting away from the typical asset allocation options on Wall Street.
Putting money into alternative investments helps you go beyond the usual trifecta of stocks, bonds, and mutual funds. These conventional options all offer a certain amount of diversification, but not as much as holding investment dollars outside of the market entirely can.
Gold is one of the most common (and understood) alternative investments. When stocks are shaky, many investors reallocate part of their portfolio into gold. Gold has a track record of steady appreciation over time, making it a popular place to park cash when market performance is unsteady.
Alternative investing is a big umbrella term, however. There are a host of different alternative investments as well as financial strategies to go with them.
Common Types of Alternative Investments
When you invest in alternatives, you’re incorporating an asset into your portfolio that sits alongside your mix of stocks, funds, and bonds. This might mean buying a house, for example, as the value of your property changes over time. This is a somewhat straightforward example, and there are other alternative investments, such as venture capital, that can be far more complex.
These are some of the more common types of alternatives:
Commodities are an asset class made up of specific resources, such as gold or coffee, that change in price due to trading. You can trade the physical good itself via spot pricing, in which the owner sells and delivers the goods to the buyer. Alternatively, you can trade derivatives, which allows you to have ownership over the commodity without having to physically possess it. The latter is much more common with investors for obvious reasons.
Some commodities, such as gold, have a historical record of maintaining value over time. Others, like coffee or wheat, fluctuate much more rapidly based on consumer demand and agricultural harvest.
Real estate is well-trodden territory as far as alternative investments go. If you own a parcel of land, an apartment, a barn, or a high-rise office building, you have real estate within your overall financial portfolio.
Real estate investing goes way beyond this, of course, and includes owning rental property or participating in real estate investment trusts. REITs provide fractional ownership of a property along with other investors. The property is then managed by the trust, taking out all of the dirty work that comes with owning and maintaining property.
Tangible assets, such as art, watches and fine wine have long been part of the investment portfolios of the very wealthy. These assets have historically appreciated in value and they have low or no correlation to the stock market, which makes them a great way to diversify a stock portfolio. Traditionally, collectors would buy these items directly from brands, luxury retailers or auction houses, but marketplaces such as luxury watch platform Chrono24 have taken the trade online.
A more recent development has been the rise of fractional ownership platforms, which make these high-value collectibles more accessible to retail investors.
Private Equity, Venture Capital, and Hedge Funds
Private equity, venture capital, and hedge funds all seek to provide the same basic outcome: an outsized return on your investment by way of business opportunities that exist outside of direct stock, bond, or mutual fund ownership.
How these institutions go about achieving this goal is where they diverge. Private equity firms use investor funds to purchase direct shares of ownership in one or several businesses, among other asset classes. The private equity space is primarily the domain of institutional investors and ultra-high net worth individuals.
Venture capital, on the other hand, is dominated much more by individuals with significant funds to invest in a handful of up-and-coming businesses. You may need to tie up your money for longer periods of time with venture capital than, say, hedge fund investing. Plus, venture capital investments tend to be much more hands-on for participants as they work through financing and other matters with the company in which they’ve invested.
Hedge funds take a different approach to investments as they make money based on the rise and fall of an asset’s value. For example, a hedge fund might hold a large portion of stock purchase options in anticipation of that stock dropping in value. If the stock hits that price (or lower), the hedge fund turns a profit from the price difference on the shares they borrowed and then re-sold to the original owner.
Farmland as an Alternative Investment
The alternatives covered above are far from the only options investors should consider. There are a wide variety of other alternatives out there, each with their own unique value proposition. Some alternatives, such as farmland investing or peer lending, can give investors a completely different investment opportunity.
Farmland investing combines many of the attributes of other alternatives. Chiefly speaking, investing in farmland is a real estate play. But instead of buying housing or commercial property, however, you’re buying the land on which a farm sits and operates. You benefit when the land itself appreciates in value, as well as when the farm sells its harvest.
Farmland also has strong ties to commodities. First, farmland tends to appreciate when agricultural commodities are more expensive. Next, farmland has a history of stable returns that track similarly to gold in terms of resilience and growth.
Lastly, farmland investing can be done on a fractional scale. With FarmTogether, for example, you can purchase shares of one or many farmland opportunities that are handpicked by our team of experts. This provides you with the flexibility of a REIT, but in a unique real estate market with its own potential for stable growth.
Picking the Right Alternative Investing Strategy
The right alternative investment is different for each portfolio. Short-term investors might like the volatility of the commodities market, whereas others might enjoy the liquidity hedge funds provide. Others still might opt for real estate, given its tendency to appreciate in value if held long enough.
If you’re looking for one alternative asset class that embodies all of these attributes and more, then farmland investing might just do the trick. When you invest with FarmTogether, you get to grow your money in ways that are similar to REITs. At the same time, you’ll also avail yourself to a steady growth prospect like you’d find in gold, albeit with a lower cost of entry. Plus, our team of experts take the guesswork out of finding the right opportunity, so all you need to do is pick from what’s available.
Disclaimer: FarmTogether is not a registered broker-dealer, investment adviser or investment manager. FarmTogether does not provide tax, legal or investment advice. This material has been prepared for informational and educational purposes only. You should consult your own tax, legal and investment advisors before engaging in any transaction.