Stocks and bonds are usually the most popular investments among people who are interested in investing. There are other types of investments available to people besides the traditional investments that are popular among individual investors and retirement savers.
Enter the world of “alternative investments.”
Alternative investments are desirable for numerous reasons, such as increasing portfolio diversity, or for purposes of achieving specific goals within different timeframes.
So, what are alternative investments? What does it mean to invest in alternative assets? Let’s explore this question in depth by looking at a definition, common investors, examples, and investment strategies.
What are alternative investments?
IRA assets that are not stocks, bonds, or cash. The three asset classes mentioned fall under the category of traditional investing. Anything that doesn’t fall into the category of “traditional investments” is considered an “alternative investment.”
Real estate is often thought of as a traditional investment. IRA’s are not as common in the investment world, but are considered an alternative to traditional investing. Alternate assets can include, but are not limited to, real estate, hedge funds, private equity, private debt, and commodities.
. . To better understand what alternative investments are, it is helpful to look at what they are not. Traditional investments can be primarily broken down into three categories:
- Stocks : These are shares of publicly-listed companies that can be bought and sold. While stocks may experience price volatility, they typically grow over the long term and are commonly held in retirement 401(k)s or through a retail brokerage account.
- Bonds : This is debt issued by companies, institutions or governments to raise funds. Because bonds pay out on a predetermined timeline and at a set interest rate, many savers depend on them for fixed income.
- Cash : Cash is commonly used as a short-term investment, think money market accounts. Typically, investors and consumers can take advantage of interest when placing their savings or excess funds in cash investments.
In contrast, an alternative investment does not fit into any of these categories and is not closely related to more traditional types of investments. Because investments like commodities, real estate and hedge funds are not subject to the same risks as stocks, bonds and cash, they can help portfolios by providing exposure to different factors or returns.
Thanks to these advantages, alternative investments are quickly growing. The financial data company Preqin estimated that the value of all alternative assets managed globally was $10.74 trillion in 2020. In 2025, the total amount of money in Assets Under Management is projected to be 60% higher than it is now, at a compound annual growth rate of 9.8%.
In general, there are a few other qualities that are often seen in alternative assets. They are:
- More illiquid than traditional investments, meaning they cannot be easily sold or converted to cash on a daily basis (whereas investors nowadays can sell stocks with a few clicks and get account credits instantly).
- Generally not regulated by the U.S. Securities and Exchange Commission (SEC), which is not to say they are entirely unregulated. The entities that offer alternative investments may be required to register with the SEC, however.
- Often packaged into complex investment structures that may seem complicated for Main Street investors.
Alternative investments have the potential to earn higher returns than traditional investments while also diversifying your portfolio. The different risks and potential rewards of investing in non-traditional assets lets investors either make long-term investments or develop a more sophisticated investment plan to try and beat the market.
The belief that alternative investments are too complicated and not based on physical assets like traditional investments are is widespread, but inaccurate. This is not always the case, as each alternative asset has a different profile. real estate investing is an investment tied to a very tangible asset: real estate. We will look at a few more examples later on.
Who owns alternative investments?
How someone chooses to invest the money in their retirement account is often restricted by their employer’s plan. The plans provide employees with a set of options that are based on the employee’s designated risk tolerance, age, and growth strategy. These plans typically do not allow for alternative investing.
Investors who are not accredited or institutional may still seek out alternative investments, but they may have difficulty obtaining them. Organizations that make large investments are called institutional investors. They can be banks, public pensions, asset management firms, trusts, insurance companies, higher education endowments, and different types of investment funds.
Accredited investors are typically high-net-worth individuals who meet certain income and asset requirements set by the SEC.
Often, these two investing groups are the primary audience for alternative assets due to the fact such investments usually require:
- High minimum investments.
- Long lock-up periods during which shares cannot be redeemed or sold.
- Familiarity with complex fund and investment structures.
This does not mean that retail investors cannot invest in alternative investments at all. More financial products are being introduced to help investors take advantage of the benefits of alternative investments, while still being able to access their money if they need it. An example of this is exchange-traded funds (ETFs). Investment products that are more liquid than other alternative investments and that follow specific investing strategies, such as index-tracking or factor investing, can be used by individual investors to gain diversified exposure, investing edge, and daily liquidity. ETFs also make it easier to invest by removing barriers such as income requirements, minimum investments and lock-up periods.
3 Reasons Why People Choose Alternative Assets
Diversification through Alternative Assets
Most financial experts believe in the benefits of diversifying one’s portfolio. When you diversify your investments, you reduce the risk of losing money if one investment decreases in value.
How many different things do you want to do at once? If you have some stocks, some bonds, and some cash, you may have a diversified investment portfolio. Although you may only have stocks, you can still be diversified by investing in different types of stocks.
If you are looking for investments outside of traditional stocks and bonds, you are considering diversification. They feel that this method provides a balance that is right.
Familiary with Different Industries
One of the reasons that investors look to alternative assets is because they are familiar with them. People often want to use the knowledge they have to their advantage.
The classic example of this is real estate . When people own homes, they understand that there is maintenance involved and that there are both pros and cons to owning. They are aware of the taxes and other costs associated with owning real estate. When people learn about the potential for high returns in the real estate investment marketplace, it gives them the confidence to transition into that industry.
Alternative assets are things that are invested in besides stocks, bonds, and cash. Real estate is the largest class of alternative assets and is often chosen because it has the potential to provide regular income through rental payments from tenants. The ability to see that a piece of real estate is yours after you have purchased it can be appealing to some people.
Lending money is another common strategy within alternative investing. Most of us have borrowed money for college, a car, or a home, so we understand how principles and interests work. Investors who want to “be the bank” for someone they know typically do so out of a familiarity with the concept of loan payments, interest, and schedules.
Shark Tank is a show where investors hear pitches from small business owners and decide if they want to invest in their company. The show has made people more interested in investing in small businesses. This type of investing is possible for some investors through hedge funds and private funds, as well as private stock offerings.
More Control Over Retirement Account
Some investors like alternative assets because they can have a say in how their money is managed. This means that you can choose to charge whatever rent you want. If you loan money out of your IRA, you get to set the terms that work best for you.
Sometimes it’s a local opportunity that pulls investors in. ” An investor told us that they own stock in Coca-Cola Corporation, but that they recently invested in a local bank that opened in their hometown. The big winner is yet to be seen, but the success of the local bank can be affected by its patrons and through word of mouth. I can’t do anything to affect the stock price of Coke, so I just have to watch the market.
investors are supportive of Main Street and small-town revitalization because these efforts are local and offer a sense of control. These revitalization efforts have given small towns new shopping and dining districts. The businesses in the community have an impact on it, and the community and its investors can have an impact on the businesses.
The investors who are not able to invest in the company right away hear of other opportunities that better match their timeline. A hedge fund with an 8 month lockup and targeted end date can help investors reach their goals. Some investors feel more comfortable knowing they have a set timeline for their investment.
Is investing in alternative assets right for you?
The answer is never a simple yes or no. People often ask us if they should invest in alternative assets. The answer is never as simple as a yes or no.
The first step is to figure out whether you can access your retirement savings. If you are in an active employer-sponsored retirement plan, you will not be able to direct your funds to any choice outside of the plan. The good news is that you are still saving for retirement, which is the real goal.
Any retirement plans you have from previous employers can be rolled into an IRA. If they already have an IRA, they can transfer it to a self-directed custodian like Midland.
If you are able to direct your own retirement investments, you will need to check if your retirement account’s institution allows it. Some companies do not handle alternative assets, and some of the larger companies which specialize in stocks and bonds also do not handle alternative assets. If that’s what you’re looking for, you should open an account with a company like Midland that specializes in alternative assets. You would open an account that is the same type as the one you currently have. You will open an account with Midland, and then move your funds from your IRA or 401(k) from Institution X to your new account with Midland.
This event is not taxable; it is simply a matter of changing who holds your retirement funds. There are a few ways to transfer funds. After the funds are transferred to Midland, you then tell Midland to buy the alternative asset you have selected.
When you invest in alternatives with your retirement funds through a company like Midland, you are not receiving advice on what to invest in. In other words, you are responsible for making sure the investment is in the best interest of Midland. Midland manages your records and ensures you stay within IRS rules and guidelines, but we cannot give investment advice. Midland does not take a percentage of your gains, like a stockbroker might. Our fees are simple and based on how much you invest, not how your investment does.
The truth is that these three reasons often have a cumulative effect. One factor that often leads people to begin to educate themselves about alternative investments is that all three layered on top of one another provide the backdrop for alternative investing. Many investors are primarily interested in stocks, bonds, and cash rather than other assets. They are not comfortable making decisions about what to invest in themselves, so they rely on others to lead those decisions.
People who put money into assets that are not the usual stocks and bonds typically take a more hands-on approach in overseeing and keeping track of their investment collection. Some investors choose self-directed retirement accounts to meet their financial planning goals for three reasons: diversity, familiarity, and control.
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