This is article 3/10 in Part I of our series, How To Build Wealth and Grow Your Wealth Through Staking.
We’ll discuss alternative investments and how they can make valuable additions to your portfolio. We hope you learn something and enjoy!
Key Takeaways
- Commodities, like precious metals, oil, timber and wheat
- Futures contracts
- Exchange Traded Funds (ETFs)
- Stocks in exploration and production companies
- Infrastructure assets
- Master Limited Partnerships (MLPs)
- Cryptocurrencies
- Collectibles
- Private equity
- Private credit
- Hedge funds
- Venture capital
Types of alternative investments
If you are looking to build wealth, alternative investments might be something to consider. They can provide diversification and potentially higher returns than traditional investments, like stocks, bonds, or real estate.
It’s important to note that alternative investments come with a higher level of risk and may not be suitable for all investors.
Some examples of alternative investments include:
1. Commodities like gold, oil, timber, and wheat can act as a hedge against inflation and add diversification to a portfolio.
These types of investments are often volatile, but can also provide a good return over the long term.
There are several ways to invest in commodities, including:
- Futures Contracts can be bought or sold for commodities such as crude oil, gold, and agricultural products. These contracts allow investors to speculate on the future price of the commodity at a future date.
- Exchange-Traded Funds (ETFs) provide investors with exposure to a basket of commodities and can be bought and sold like stocks.
- Mutual funds that invest in commodities or companies involved in the commodity industry.
- Some investors choose to hold physical commodities such as gold bullion or silver coins.
- Investing in stocks of companies involved in commodity production and exploration, like mining or oil companies.
2. Infrastructure assets like roads, bridges, and airports can provide a stable source of income and can be a good hedge against inflation.
These investments can be made through infrastructure funds, municipal bonds, or by directly investing in infrastructure projects.
3. A Master Limited Partnership (MLP) is a type of business structure. They are usually formed by companies in the energy sector to raise capital for expansion and growth.
MLPs are structured as partnerships, rather than taxed at the corporate level. They avoid double taxation and pay out a significant portion of their income to shareholders as dividends.
As a result, MLPs are attractive to income-focused investors.
4. Cryptocurrencies, like Bitcoin and Ethereum use cryptography for security. Cryptocurrencies are decentralized and operate on a blockchain.
Public blockchains are transaction databases that function as distributed ledgers. Transaction records are kept by decentralized miners and validators, instead of on a centralized corporate server.
These blockchains operate independently of governments and central banks.
We run validator nodes that create and verify blocks for Polygon, Cosmos Hub, and Kava.
There are risks associated with investing in cryptocurrency. The lack of oversight and regulation can make crypto investors more susceptible to fraud and hacking.
Plus, cryptocurrency values can fluctuate rapidly, so it can be difficult to value and predict the performance of these investments.
5. Collectibles, like art, rare coins, stamps, and vintage wines are alternative investments. They can be illiquid, however. That means that in the event of a financial emergency, it may be difficult to sell the collectible quickly or at a fair price.
Alternative investments, like collectibles, may require a high level of expertise to make money.
For example, investing in fine art requires knowledge of the art market, the value of different artists, and knowing how to value its condition.
Similarly, investing in rare coins, stamps, or vintage wines requires knowledge of those markets. You must know the rarity, condition, and historical significance.
6. Private equity investments are ownership stakes in a private company or a portfolio of private companies.
These investments are usually only made available to institutional investors or high-net-worth individuals. These investments are not publicly traded on stock exchanges.
Private equity firms typically aim to generate returns through a combination of operational improvements and financial engineering.
Examples are leveraged buyouts, growth capital investments, and turnaround investments. They are considered to be high-risk, high-return opportunities that are not suitable for all investors.
7. Private credit investments allow high-net-worth individuals to lend money to private institutions. These loans offer higher yields than many publicly traded bonds, but can be difficult to sell if you need money fast.
8. Hedge funds use a variety of investment strategies, like long/short, leverage, and derivatives to generate returns.
Hedge funds can be a good option for investors who are willing to accept higher levels of risk in exchange for potentially higher returns.
They are generally only available for accredited investors, having $1 million or more liquid net worth.
9. Venture Capital invests in early-stage startups and can be a high-risk, high-reward option for investors. VC investments typically require a significant amount of capital and a long-term time horizon.
Well-known VC companies are Andreessen Horowitz, Pantera Capital, and Sequoia Capital.
Alternative investment management fees, performance fees, and transaction fees may be high. These fees reduce your returns and should be considered.
Another important factor to consider is the level of expertise required. Venture capital, private equity, private credit, and hedge funds require a high level of knowledge. They are less suitable for the average investor, but alternative investments like real estate and commodities can be more accessible to the average investor. These investments are often easier to understand.
Diversification is key. Investing in a variety of alternative investments can help spread out the risk and increase the chances of achieving your investment goals.
In addition, be aware of the tax implications of alternative investments. Consult with a tax professional or financial advisor to understand how they may affect you.
Alternative investments include commodities, infrastructure assets, MLPs, cryptocurrencies, collectibles, private equity, hedge funds, and venture capital. They can generate higher returns than traditional investments, but it’s important to understand the level of expertise required, potential risks, tax implications, liquidity, and fee structure.
Be on the lookout for the next article in the How To Build Wealth Series: Alternative Investment: Affiliate Marketing.
Frequently Asked Questions
Adding alternative investments to your portfolio will provide diversification and may increase your returns, but may also add volatility. It’s important to know your time horizon and risk tolerance.
According to CNBC, 10% to 20%.
Tax implications, reduced liquidity, fee structure, high minimum investment, complexity and expertise required, and lack of regulation.
Environmental, social and governmental (ESG) investments are trending, investing with moral values that align with public good.
Market research firm, Preqin says the total dollar value has more than doubled between 2015 and 2021 to $13 trillion. That amount is forecast to reach $23 trillion by 2026
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