Portfolio Expansion: Venturing into Unconventional Investment Options beyond Typical Property and Stocks
Portfolio Expansion: Venturing into Unconventional Investment Options beyond Typical Property and Stocks
Aaron Cirksena is the mastermind and leader behind the creation and operation of Modern Capital.
Current investors encounter distinctive challenges. Sky-high inflation is gnawing away at portfolio value, market instability has made it harder than ever to estimate returns and manage risk, and the interest rates connected to bonds and savings accounts are at historical lows, weakening the impact of traditional diversification strategies.
In an attempt to strengthen their position, some investors are on the lookout for alternative investment options. The following are some choices that are accessible now.
Commodities
Commodities, which encompass raw materials like oil, wheat, and livestock, make up an alternative investment class that attracts investors due to the impressive returns they can produce during market turmoil. Although they are more volatile than traditional investments as a result of potential fluctuations triggered by market adjustments, political events, and natural disasters, they have a low correlation with traditional assets, making them an appealing substitute for investors seeking to establish diversification.
Commodities also offer a hedge against inflation as their values often climb in tandem with inflation.
Real Estate
For years, investors have been drawn to real estate due to its potential for high returns. Although it generally fails to match the long-term returns of the stock market, real estate's risk-adjusted returns outperform traditional markets. Real estate also offers additional earning potential in the form of rental income and the possibility to acquire more earning power through the use of mortgages to finance acquisitions.
Real estate helps with diversification by offering investors a hedge against inflation. While rental rates usually keep pace with inflation, property values often exceed it. The downside for investors is that rising inflation can slow the pace of sales, making it difficult to realize high real estate values.
Real estate investment trusts (REITs) have become increasingly popular among investors in recent decades. These trusts, which operate similarly to mutual funds, allow investors to earn income from real estate without actually purchasing properties. They benefit from dividends and increases in the value of their shares.
Private Equity
Whereas stocks enable investment in publicly traded companies, private equity is the method for investing in private companies. Investors gain access to this asset by partnering with private equity firms that raise capital from investors. The firms then use the funds to invest in private companies in ways that increase their value.
Private equity offers higher potential returns than traditional assets but also comes with higher risks. Private equity funds generally focus on a select group of companies, depriving them of the benefits associated with diversification. Private companies are also not subject to the disclosure requirements of public companies, resulting in private equity investors having limited information to guide their investment choices.
Investors seeking long-term options will likely feel most comfortable with private equity. Private equity firms typically focus on building value over time in the companies they invest in, so investor contributions remain illiquid until the fund's term ends.
Annuities
Annuities primarily aim to supply investors with a steady income stream for retirement. Through a long-term contract established between the investor and an insurance company, annuities allow investors to pay a premium for a set number of years in order to secure a guaranteed payout period. While secure, their returns may not keep pace with rising inflation.
Fixed index annuities provide return performance tied to a market index, lowering the investor's volatility risk and management fees. They also offer investors principal protection, keeping contributions safe even during market downturns.
Fine Art
In times of economic uncertainty, the value of traditional assets can be significantly impacted. As corporate profits decrease, stock prices follow, and corporate bonds may also suffer losses.
Fine art and collectibles have proven to be resilient in recessions. Recent studies have shown that this investment class not only performs better than stock markets but also rebounds faster during periods of economic uncertainty.
In recent years, art funds have emerged that provide investors with an opportunity to own shares of fine art collected by experts. These funds establish holding companies that invest in artwork and promote and resell it, allowing investors to profit from the gains.
Cryptocurrency
The 2024 U.S. presidential election highlights why some investors searching for high returns have been attracted to cryptocurrency. As an example, on November 6, 2024—the morning following the election—bitcoin surged almost 8%, reaching a record value exceeding $75,000. Other popular coins saw gains of up to 17% following public announcement of election results.
However, investors must also face significant risks to access those returns. In its short history, bitcoin has also provided investors with substantial losses, including a 53% loss over a one-month period in 2022.
Crypto investors also face risks associated with the lack of regulation in the crypto space. While some controls are emerging, they are largely untested. Moreover, the rapid pace of innovation in the crypto world leaves regulators playing catch-up. New investors must enter the crypto world knowing that the value of this asset class can easily be manipulated.
A variety of options are available for investors looking to broaden their portfolio beyond traditional assets. However, each should be carefully evaluated through the lens of tolerance for risk, time frames, and overall investment goals.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice tailored to your specific situation.
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In light of the challenges faced by current investors, Aaron Cirksena and his team at Modern Capital might find alternative investment options such as commodities, real estate, private equity, annuities, fine art, or cryptocurrency appealing. These investment classes offer various benefits, including diversification, hedging against inflation, and potential for high returns, despite their associated risks.