The term “alternative assets” sounds like something an everyday investor either doesn’t know anything about or has no way to access them. Both accounts are false. You might be thinking, well what do I know about these so-called alternative assets? Probably more than you think.
I had the same feeling when I got the idea to study the CAIA charter. Yet, as I went through the topics I realized I knew about or had heard of these assets before. I simply didn’t know they were called alternative.
You most likely have heard of a few of these assets. For example, real estate, gold, or commodities. Yep, it’s that simple. There are more sophisticated assets as well like hedge funds and others. Let’s stick to the core assets that are easy to understand and invest in.
We’ll have a look at what assets you can add to your investment portfolio, that are not traditional stocks and bonds. Adding alternative assets allows you to protect your portfolio from market shocks and may help in hedging against inflation.
Table of Contents
Real Estate Investing
Real estate investing is probably the most common asset after stocks, how many of us own a home? That too is real estate investing. Of course, you could want to make further investments in real estate. But what if your savings aren’t enough to buy another house or apartment?
You can make investments in REITs. These are companies that invest in and operate real estate. They are publicly quoted on exchanges just like common stock. Publicly traded stocks allow you to participate in the revenues and capital growth offered by real estate at a fraction of the full investment cost.
REITs are also easy to sell in case you need to cash in on your investment. As they are quoted on exchanges it won’t take you months to sell your real estate investment.
These companies are experts in the field so you don’t have to learn the trade. They also invest and operate all kinds of real estate such as hotels, shopping malls, and cell towers. You can learn more about REIT investing in this guide to REIT stock investing.
Gold & Precious Metals
Gold has been a keeper of value for thousands of years, and that aspect doesn’t look like it will change anytime soon. Gold is typically known for its durability, malleability, and attractiveness. But nowadays it is also used extensively in electronics and various industries.
The demand for gold simply put is very unlikely to decline. Not only is there increasing demand from the manufacture of various products but also increased demand for jewelry. China & India account for 50% of global gold demand. The thing is, their economies are expanding at a galloping rate. As the countries’ citizens get richer their demand for gold is also likely to rise.
Gold has been known to keep its value over time, come what may. Gold’s price is highly unconnected to what the stock and bond markets might be doing. Basically, it has its own life, where a crisis in the stock and bond markets simply does not spillover.
Gold Performance in 2020/2021
Take a look at the coronavirus crisis in 2020. The Dow Jones Industrial average dropped approximately 40%. How did gold do? Gold continued to rise initially, and then only lost 12%. That smaller drop amounts to a lot of protection for your portfolio.
More importantly, gold has continued to rise, True stocks have had a spectacular rally since the bottom of the corona selloff. But looking at the performance for the past 2 years, since September 2019 gold has increased 52.15% while the Dow Jones has risen 39.88%
You may or may not want to physically hold gold, although the matter is easier than it sounds as various companies can do the storage and transportation for you. Gold bullion also fits into your IRA, you can get more info on how it all works here.
If you don’t want to own the physical asset directly you could always buy a gold fund. There are many, and possibly the easiest way is through a gold or precious metal ETF. From the ETF database website, you’ll find a list of gold ETFs.
If you want to expand your horizon you could go with a precious metal ETF. They usually hold several of the most precious metals like palladium, gold, platinum, or rhodium. These funds hold physical stakes in the commodities. However, you’ll also find ETFs that invest in mining companies or futures.
Commodities
Not all commodities are made the same. The list of commodities ranges from things like corn and wheat, or natural gas and copper. One thing is for sure they are necessary at various levels of production and consumption.
As with all portfolios, if you are going to invest in commodities choosing the winning horse may prove difficult. Also, you want to diversify your risk by investing in a basket of commodities rather than choosing one or two in the hope of spectacular returns.
The easiest way I see to get access to a varied investment of commodities is to invest in an ETF. There are various out there run by reliable and knowledgeable asset managers. There’s a good list on the ETF Database website that lists ETFs by asset size.
These ETFs can invest in a specific type of commodities, such as crude oil or bulk shipping. Usually, they attempt to imitate a broad index of commodities using futures. The choice of futures is practical.
Other Details
The fund avoids the cost of having to hold the commodity stored in a warehouse. They also have a market to invest in that is usually active and therefore liquid, making purchasing and selling their commodity positions easier.
Looking at the list of 25 ETFs you’ll see that the lowest yield for the current year is 14.62%, and the highest, bulk shipping, is 226.75%. The Dow Jones has climbed 18.7% so far this year, of the 25 ETFs in the list all, but one, have had better returns so far.
If the size is important to you then the largest fund with assets of $6.8 billion has increased by 44.9% so far. It invests in a broad base of commodities and uses futures to make its investments.
Bottom Line
Holding alternative assets in your investment portfolio simply makes sense. They allow for a different source of income. You will have a diversified portfolio reducing your overall risk, and significantly reducing your exposure to the stock and bond markets.
Gold and commodities in particular seem to have the capability of defending your investment from high bouts of inflation. If inflation goes up, it is most probable that the rising value of commodities is a part of it. So, it’s like having an asset that may benefit from high inflation and protect more of your wealth during downturns.
