Are you an investor looking for an exotic investment? Perhaps you’re tired of traditional stock options and wish to invest elsewhere.
If so, consider alternative investment options.
What is an alternative investment?
An alternative investment is anything outside of traditional investment vehicles, such as stocks, bonds, and cash. It usually entails physical assets: commodities, oil and gas, or real estate.
Gold as an investment gives you stability during economic uncertainty. Real estate provides the same security and is another tangible investment.
Alternative investments come with unique risks, but they can diversify your portfolio and expand your investment worth. This article will show provide greater insight into alternative investment vehicles. Let’s explore.
The Safe Realm of Real Estate
Real estate is among the safest investments you can make because everyone needs a home. Alternative investments also include commercial properties and industrial properties.
Commercial real estate comprises structures used for business purposes. Industrial real estate involves large-scale facilities, such as warehouses or manufacturing centers.
With that, direct investment isn’t a requirement. Rather, you can choose real estate exchange-traded funds (ETFs).
Real estate ETFs minimize volatility, comprising multiple assets across the real estate sector. Earlier real estate ETFs consisted of commercial properties alone, but you’ll find more options (i.e. residential investments) in today’s market.
A single stock, on the other hand, comes with additional turbulence. A stock may underperform due to bad management or uncertain economic conditions. With ETFs, you can foster diversification to offset the risks associated with conventional stocks.
Further, real estate ETFs offer additional liquidity, allowing you to sell faster. Conversely, you should also be aware of the cons, such as:
- High Taxation: The federal government classifies real estate ETF income as standard income. Therefore, the income you receive doesn’t qualify as dividend income. As a result, you could face a larger tax burden.
- More Fees: ETFs typically come with additional fees. The fees aren’t high, but they still deduct from your income.
- Meager Returns: If you’re not careful, you may end up with average returns. To avoid this problem, choose the best players in the industry.
You must also pay property taxes to state authorities. To make matters worse, the fluctuating nature of property taxes could eat away your profits. The tax issue may be a deal-breaker for many investors, but you can place ETFs in a retirement IRA.
A New Type of IRA
Alternative IRAs are a recent phenomenon. They allow you to place unconventional investments in an IRA. You can find many custodians who hold traditional investments and alternative investments.
You can include various types of alternatives in an IRA, such as:
- Futures
- Oil and gas leases
- Real estate
- Commodities
IRAs can provide peace of mind if you’re tired of seeing your investments dwindle after an economic calamity. The main drawback is that most alternative IRA investments are only accessible to accredited investors under the SEC.
If you want to become accredited, you must meet at least one of the following rules:
- You have a net worth of over $1 million.
- You have a minimum $200,000 a year in income (or minimum $300,000 in joint annual income)
- You have a business partner or an associate linked to the investment in question.
Regardless of accreditation, many experts recommend limiting IRA alternative bets within the range of five to ten percent.
Never Going Wrong with Gold
Gold will always remain in demand around the world. It’s an alternative investment because it helps you hedge against inflation.
Additionally, a diverse portfolio including gold protects you from volatile market conditions. This means the price of gold goes up when conventional markets decline.
- Example: If the dollar crashes or falters, the value of your gold will increase in value. As a result, you can sell gold when prices are higher.
Further, gold offers high liquidity when you need it most. Consider this bonus: you don’t have to pay a capital gains tax until you selling it.
You can purchase gold in the following ways:
- Purchasing the asset directly (i.e. gold bullion)
- Trading options and futures
- Buying shares of a gold ETF or a mutual fund
- Investing in a gold mine
If you’re an average investor, consider direct purchasing, as it’s the most accessible way to invest in gold. You can buy gold in bar form or coin form.
You can also invest in gold jewelry as another option. When buying gold jewelry, however, assess the gold purity to avoid overpaying. When gold buying, make sure the dealer has a positive reputation.
Many experienced investors choose the futures option. Consider this choice if you don’t want to risk a great deal of capital. A future entails the right to purchase the asset, but it’s not an obligation. You’ll buy the gold within a certain timeframe.
The ETF route also offers the same futures alternative. Regardless, you’ll only buy the asset based on gold prices. A wrong decision means you’ll lose the money you paid for the contract.
Finally, a gold mine is another indirect way to enter the gold market. However, gold mines don’t always coincide with the gold market. The reason is that gold mines derive value from output.
If a company fails to extract gold, you don’t have a physical asset. Therefore, only consider a mining company with a good track record and a solid plan of action.
Alternative Investment Options: Which Asset is the Right Choice for Me?
The best alternative investment options should make you feel comfortable. Resist market hype, and avoid delving into unfamiliar investments. Overall, an alternative investment is a low risk investment that can protect your portfolio during troubled times.
Interested in learning more? Read more on our blog to gain insight into other valuable topics.
