Top 5 Alternative Investments to Watch in 2020

UTC by Osaemezu Ogwu · 13 min read
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Photo: Depositphotos
Photo: Depositphotos

Alternative investments offer small and institutional investors an opportunity to diversify their portfolio. Check everything you should know about top investment opportunities in this complete guide.

The top alternative investments to watch in 2020 hold a lot of promise for the near future. These investments offer investors an opportunity to diversify their portfolio. Accordingly, anyone looking forward to the prospect of their money growing significantly needs to give each of these a serious consideration.

What is an Alternative Investment?

Investments other than these three traditional assets: cash, bonds, and stocks are known as alternative investments. These investments come with a promise of immense returns, however, they are risky. The risky nature of these assets can be tied to the fact that they are unregulated, unlike the traditional asset classes.

On the other hand, alternative investments can be classified as tangible and intangible investments. Some examples of tangible alternative investments are:

  • Wine
  • Stamps
  • Fine art
  • Antiques
  • Real estate
  • Precious metals
  • Commodities and natural resources

Some examples of intangible alternative investments are:

  • Hedge funds
  • Private equity
  • Venture capital
  • Cryptocurrency
  • Derivative contracts

Pros of Alternative Investments

The benefits of alternative investments are:

Risk Redistribution

Alternative investments help to diversify an investor’s portfolio, thereby redistributing the risk. In this case, return on investments is not tied to the performance of the stock market. As such, neither does a dip in the stock market nor economic uncertainty have a major impact on returns.

Higher Returns

There is no guarantee that profit will always be made while investing in alternative investments. However, there’s a potential for the profit made from these investments to be higher compared to returns from traditional investments.

Cons of Alternative Investments

The disadvantages of alternative investments are:

High Cost of Investment

Alternative investments can be likened to a game for only the rich since high capital is needed to be an investor. These assets are often sold only to accredited institutional investors. For this reason, an average investor may be unable to afford the minimum investment amount required and the same goes for the fee.

Complexity

There’s also the complexity involved in understanding how the system works. For starters, specific knowledge may be required in the valuation of alternative investments or in determining their fair market prices. The demand patterns of these assets may also be unpredictable, thereby making their valuation complicated.

Here’s a list of the alternative investments to watch in 2020. They include:

Precious Metals

Gold and silver are precious metals and either of these assets serves as a store of value. This is because they do not rise or fall due to inflation as is often the case with fiat. Further, gold’s value is not tied to stock or other assets, which enables it to maintain its value when there are sell-offs in these markets. As such, investors often use gold as a hedge against economic uncertainties.

How to Invest in Gold

Potential investors who are interested in earning from owning gold can do so by either investing in the asset directly or indirectly. Here’s how:

Gold Bars or Coins

You can directly invest in gold by purchasing gold bullions such as bars, coins, etc. Gold bars or coins can be held for a certain amount of time before it is sold for profit. Also, gold bars often have a serial number on them for security purposes. As such, if you lose it, it can easily be traced. It also makes it easy to identify a fake. Another advantage of opting for physical gold is that investors will avoid the fees that would’ve been incurred from investing in this asset through an ETF.

Nonetheless, large gold bars are expensive to buy and sell. In the case of the latter, investors can’t easily sell a certain percentage of what they own. For example, if they decide to sell 20% of the bar, a portion cannot be sawed off. Needless to say, it is easier to buy and sell small-sized bars or coins.

Gold ETFs

Instead of sourcing for where to purchase gold offline, you can opt for gold exchange-traded funds (ETFs). This is another method of investing in gold and it is a simpler process compared to buying physical gold. In this case, each share purchased represents a fixed amount of gold.

Small investors can opt for gold ETFs since the investment capital is lower compared to buying large gold bars or coins. Allocating 5 to 10% of your portfolio is often advised for individuals looking to invest in gold. Alternatively, the downside is that fees will be incurred for buying and selling gold on these exchanges.

Stocks, Futures, and Options

One more way to invest in gold without buying it physically is to indirectly invest via stocks, futures, or options. Let’s take futures, for instance, it will involve contracts to buy a certain amount of gold at a particular date in the future, and at a specific price. Nonetheless, this method of investment is more suited for professional investors. For more information, feel free to check our “How to Invest in Gold” guide.

Cryptocurrencies

Cryptocurrencies are one of the best alternative investments. Like gold, they are also a good store of value and serve as a hedge against financial crises. In the same vein, the value of digital currencies is not tied to the performance of stocks and bonds, as such, when either of these tanks, cryptocurrencies could be surging.

Over and above that, the adoption of this asset class is increasing by the day due to the efforts of institutional and small investors. And despite the recent dip in the crypto market, speculations are still high that cryptocurrencies like bitcoin will perform exceptionally well in 2020 and beyond due to increasing demand and reduced supply.

How to Invest in Cryptocurrencies

Some methods of investing in cryptocurrencies are:

Trading Cryptocurrencies

There are cryptocurrency exchanges where you can trade digital currencies such as Bitcoin for a profit. An investor can either choose to be a scalper, day trader, swing trader, position trader, or trend trader. However, the level of risk is high when it comes to trading this asset class given that their price is very volatile.

Accordingly, knowledge, focus, and patience are required to trade cryptocurrencies for a profit. Emotions such as fear, anger, anxiety, etc. have to be set aside not to make rash decisions. The advantage of trading cryptocurrencies lies in the fact that they yield profit fast. Nonetheless, the speed at which profits are generated is the same at which losses can be incurred and these losses may even be faster.

Holding for Long Term

You can also opt to buy an asset to hold for the long term. Compared to actively trading cryptocurrencies, the risk level here is lower. Therefore, investors need to look for good buying opportunities to steadily increase their portfolio. And in months or a few years from now, they could sell off these assets, which may result in exponential gains.

To hold cryptocurrencies, safe wallets have to be used to ensure that the funds are not susceptible to an attack. Accordingly, cold or offline wallets that are not connected to the internet are often recommended. Some companies offer custodial wallets, which are insured with millions of dollars in case of theft or hack of funds.

Futures Contracts

Futures contracts are an indirect way of investing in cryptocurrencies. Several companies allow investors to purchase contracts with a cryptocurrency as the underlying asset. However, institutional investors are often the major investors in these funds. This is because the minimum investment capital is high.

Real Estate

Real estate is a safe investment that can yield immense profit for its investors. This investment vehicle performs well whether the economy is booming or in a downtrend. Remarkably, market corrections do not occur often. And it is worth noting that only 7% of market corrections were able to cause up to 20% decline in real prices.

Accordingly, the low risk associated with real estate investments makes it attractive. However, it is worth noting that a great deal of skill and patience is required to yield good profit. And compared to some alternative investments, it may take a longer time to see meaningful returns.

How to Invest in Real Estate

Investments in real estate can be made in the following ways:

Purchase a Property

Purchasing a property such as a house, duplex, etc. is one way to invest in real estate. For instance, an apartment can be bought and its rooms rented to tenants. Here, a down payment can be made, while the bank provides the remaining funds needed. On the other hand, there are benefits of being a landlord since you’ll be getting steady income on a monthly or yearly basis.

Nonetheless, being a landlord can be just as stressful since tenants may break things in the building or default on their payment. However, you can resort to a property management company that will take over overseeing the building in terms of repairs, rent collection, and lots more.

Online Investment Platform

Online investment platforms such as PeerStreet, Prosper, Fundrise, etc. offer investors the opportunity to finance real estate projects such as home renovation. Even without having good knowledge of properties, investors can earn a profit. This is because these projects are often managed by professional developers.

Despite this, online real estate investment comes with its own level of risks, hence, you must carry out due research more dipping your feet. There are also the fees that will need to be paid to the company that links you to these projects. What’s more, only people accredited may be allowed to invest.

Real Estate Trading or Flipping

Real estate trading, also known as flipping involves buying homes and redesigning them only to sell at a price higher than the price they were purchased coupled with the cost of renovation. The investor seeks for underpriced homes that could potentially sell higher if remodeled. However, there is still a level of risk when it comes to flipping. For example, the cost of repairs has to be estimated accurately to have the right budget.

There’s also the risk of paying back more mortgage when the house has not been resold. As such, expenses were made to improve the building, and more are still being made to cover the mortgage loan, whereas no income has been made. Accordingly, you can partner with other investors to reduce the risk. This is because the purchase and management of the property is done as a group, and losses are equally borne if the project fails.

Peer-to-Peer Lending

Peer-to-peer (P2P) lending, although new, is gaining popularity. Here, P2P services offer secured and unsecured loans to borrowers for different purposes. The loan can be for personal use or to finance businesses. Some P2P services include Prosper, Lending Club, and PeerForm.

On the other hand, the loans issued by these services are sourced from a network of investors. These investors are given fixed repayments and interest every month. That being the case, it is possible for the returns from P2P lending to be more than conventional saving vehicles.

And as would be the case of most investments, there is still a level of risk when it comes to P2P lending. For instance, borrowers may default on their payment. These may be borrowers that found it difficult to obtain loans from other sources due to low credit score.

Likewise, it may be impossible to carry out a background check on a potential borrower before funds are released to them. Some websites distribute the money that is to be lent between several borrowers, whereas others allow the investor to ascertain who they will like to lend to.

Nonetheless, investors can set the criteria for lending to a borrower before their funds are issued. They can also choose the most reputable P2P lending services that take the extra time to assess an individual to ascertain their ability to repay even before they are funded.

Borrowers, on the other hand, benefit from P2P lending since they provide faster loans. This because banks do not work with P2P lending platforms, which eliminates intermediary. What’s more, the competition between PSP lending platforms offers lower interest rates and origination fees.

How to Join A Peer to Peer Lending Platform

Here’s how to join a peer to peer lending platform:

  • Look for a reputable and reliable P2P lender online.
  • Open an account on the platform
  • Use your debit card or credit card to fund the account
  • Set your interest rate or agree to the predefined rate
  • Set the fixed period of time to lend

Equity Crowdfunding

Businesses have adopted a strategy of allowing interested members of the public to own shares in their company. These firms sell the shares of their company on crowdfunding platforms including SeedInvest and AngelList. As such, it gives investors an opportunity to own part of a business without setting up theirs.

Investors, on the other hand, who purchase these shares automatically own a part of the company. Therefore, they’ll have a share in the profit made by the company. For instance, General Motors purchased Cruise Automation in 2016, and the latter is a technology company that was set up through equity crowdfunding. Hence, early investors in the company benefitted from the purchase.

Another example is that of Facebook‘s acquisition of Oculus Rift, a maker of virtual reality video game headset. While the company raised its $2.4 million funds as a donation from 9,500 people, Facebook purchased it $2 billion. However, the donators did not reap benefits from this investment since they had donated and not invested in Oculus Rift.

That aside, there are gains to be made in crowdfunding but investors will also be putting their money at risk if the company suffers losses. It can be said that the huge returns to be made is synonymous with the losses that could be incurred. For instance, investments in equity crowdfunded ventures often take years to bring returns. And some could be longer due to the company’s deviation from its initial plan, or setbacks that have prevented the business from scaling.

How to Invest in Equity Crowdfunding

Investments in equity crowdfunding can be made in the following ways:

Valuing Companies

It is important for investors to understand the percentage they’ll own in the company as they commit their money. Good knowledge of their share can be gotten from terms like pre-money valuation and post-money valuation. Pre-money valuation describes the company’s value before an investment is made. Post-money valuation, on the other hand, is the company’s value after it has received investments.

For example, a company may be worth $200,000 before its crowdfunding event. Hence, this is the Pre-money valuation. After the event, the company may be worth $5 million, and this is a post-money valuation. The company’s future valuation can be determined by considering factors like:

  • Demand
  • Management team
  • Comparable companies
  • Market size and competition

Diversifying

Given the risks of equity crowdfunding, it is needful to diversify your investment. You can choose several companies with good potential to invest in instead of singly out only one.

Conclusion

Alternative investments offer small and institutional investors an opportunity to diversify their portfolio. Instead of depending solely on cash, stocks, bonds, and investments that rely on brokers, investors can also make good money using these other asset classes. Nonetheless, each of these investments has its own level of risk, which investors have to be wary of.

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