Alternative investments have just opened up to allow more investors in. Due to a change in regulatory laws in 2020, more investors can now trade in these investments that were kept out before.
But what is an alternative investment, and what are the benefits of alternative investments? If you are new to the world of alternative investments, we’ve got you covered. Keep reading to learn 7 impressive benefits of alternative investments you won’t want to miss.
What is an alternative investment? Oil and gas, precious metals, a hedge fund platform, real estate, and venture capital are all examples of alternative investments.
Recent regulation changes have opened up this subset of investments to more investors seeking to diversify their portfolios.
Your financial advisor has probably mentioned some of these alternative investments to you, and you may have some holding in your portfolio already. I
f you don’t already take advantage of the investing benefits of alternative investments, you should. Keep reading to learn 7 benefits of alternative investments.
1. Alternative Investments Provide Passive Income
Most investors have to manage their portfolios actively. This is an enormous amount of work that can take a lot of time.
Take real estate, for example. Investors don’t realize how much time it takes to rent a small multifamily apartment and keep it rented out all year long. Millions of people want to teach you how to make money through real estate investing, but many of them fail to demonstrate how hands-on the entire process is.
On the other hand, alternative investments are almost completely passive. They do not require ongoing management. You will also be able to leverage the experience, relationships, and team of experienced operators.
2. They Provide Strong Sources of Income
Some private alternative investments are cash-flowing investments. This means that they pay you back in cash on a quarterly or even a monthly basis.
Many of these alternative investments produce strong income streams and are structures to pay investors first and cash.
If you’ve tried to earn income through public investments like CDs, bonds, or stocks that pay dividends, you know how difficult it can be. Public markets can also be highly volatile; increasing the risk of generating a small profit is great. Alternative investments provide just the opposite.
3. Many Alternative Investments Have Tax Benefits
Why invest in alternative investments? Because they have excellent tax benefits! Many forms of alternative investments allow you to keep more of the profits.
In many types of private alternative investments, the structure allows you to become an owner of the fund. Therefore tax benefits are directly bestowed upon you because you are part owner.
Two of these tax benefits are long-term capital gains and pass-through depreciation tax benefits. Many real estate funds deduct depreciation expenses from their net income reducing their amount of taxable income.
Oil and gas investments also have very accommodating depreciation and depletion tax treatments for investors.
Most investors are unaware of these tax benefits. They are also unaware that they can invest in alternative investments by using qualified retirement funds such as an IRA or a 401K. It’s quite possible to grow your investments tax-free or even tax-deferred.
4. Ownership of Investments
When you buy a publicly traded stock, what you are actually buying is a piece of paper. This paper represents a discounted value of future expected earnings. In all actuality, you don’t really own anything.
However, if you decide to invest in art or wine, you will own the paintings and bottles. If you invest in real estate properties, you will own the home. If you invest in a private fund, you will generally have ownership over whatever asset they acquire.
Most alternative investors become part-owners, as previously explained in point three. You
5. Alternative Investments Are Not as Volatile
In traditional public investments, the prices fluctuate depending on several factors. Most of the time, the price fluctuates for reasons outside of the company’s performance. These types of investments are generally not tied to an actual asset.
Private investments like alternative investments are not publicly traded and therefore skip over all of the volatility related to public investments. Also, alternative investments are usually tied to an actual asset that is worth money.
Many investors will tell you volatility doesn’t matter if you are in it for the long haul, but what they don’t understand is that volatility kills compounding.
An investment that earns a steady rate, even if it is a little bit of a lower rate, such as 9% or 10%, will usually outperform a publicly-traded stock with highs and lows due to market volatility.
6. Alternative Investments Are Not Tied to the Stock Market
Every investor who has traded funds on the New York Stock Exchange will appreciate this point. As an investor, you’ve probably experienced some major wins and some huge losses. You’ve probably experienced heartburn watching the market crash and your portfolio drop dramatically.
What are alternative investments good at? Diversification! One of the main reasons why investors buy alternative investments is to diversify their portfolios. A recent study shows diversification and good returns as the top two reasons why investors seek alternative investments.
Investments that are not tied to the stock market mean you won’t have to hold your breath every time the stock market decides to take a downward swing. This is one of the key benefits of owning alternative investments as part of your investment portfolio.
7. Protection From Inflation
Last but not least alternative investments can help protect against inflation. Most stocks offer long-term inflation protection, but as inflation rises, stock prices can fall as investors get nervous about the economy’s health.
Many publicly traded companies will lose revenue as people begin to pull back on spending. Alternative investments are usually less likely to be directly harmed by inflationary pressures.
Invest in Alternative Investments Today
If you haven’t already considered purchasing alternative investments to diversify your portfolio, now is the time to do so. Take a look at the above benefits and narrow down which alternative investment options are right for you.
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