Gotta diversify! Come up in the spot lookin' extra FLY 🛸
Unfold Weekly's guide to alternative investments.
Traditionally, investments are synonymous with stocks or bonds, but as Fergie implied, stocks are so “2000 and late 🎵.”
That reference was probably 2000 and late as well.
While the market has been booming despite a global pandemic that has decimated jobs and hindered the actual economy, one can no longer simply split savings across stocks and bonds. A well-diversified portfolio requires some, well, diversification. Alternative investments aren’t new, but increased focus has grown exponentially in the recent years and months. For this week, let’s take a deeper dive into alternative investments and how you should look to take advantage.
Fair warning, we are not providing any investment advice in this newsletter. Heck, if we knew an investing secret, I don’t think we would be writing a newsletter at all 🤷♀️!
Alternative, Schmalternative
So what are alternative investments? Do the Smashing Pumpkins, Weezer, or RHCP apply? Apologies, bad alternative rock joke. Moving on. Alternative investments are investments in an asset class outside of traditional stocks, bonds, and cash. The cool kids may refer to them as “alts.” These investments cover a wide range of classes — from more traditional alts like real estate 🏗️ and private equity, to newer areas such as art 🖼️, sports cards, and NFTs.
Read more here: A Beginners Guide to Alternative Investments
I’m a traditionalist and alternative (music) scares me
Alternative investments are not for everyone. In fact, until recently, many of these investments were literally not for everyone. Access was once limited to the wealthy 💰 and entities who were legally allowed to invest in securities that may not be financially regulated. For instance, an accredited investor must have an income exceeding $200k or have a net worth >$1M. However, the ease of access has been greatly increased in recent years. Not a millionaire yet? No problem! Fundrise, for instance, allows for the everyday wo(man) to access real estate for investment purposes. Yieldstreet allows investors to access a plethora of alternative investments across art, commercial, real estate, and beyond. With accessibility on the rise, more amateur investors can experience the diversified growth 📈 that was once limited to the big wigs on Wall Street.
Alternative investments offer greater diversification. If 2020 taught us anything, it’s that no one has a damn clue what’s going on, and apparently the market only goes up?
Narrator: the market does not, in fact, always go up.
There is less correlation with many alternative investments to the stock or bond market so it allows for hedges against the typical downturn. Many (not all) of these asset classes have low overall risk for potential higher returns. That Pokémon card you purchased in for $1 in 1998 could be worth $150,000 today…assuming you had the willpower and clean fingers 🧼 to not destroy the quality.
This all sounds great, but what’s the catch?
Of course, alternative investments are not all 🌈 and 🦋. Unlike traditional asset classes (again, stocks, bonds, etc.), alts are not traded on public markets such as a stock exchange. Thus, there tends to be less price transparency and liquidity. Selling that digital piece of art depicting Snoopy drinking scotch with Tony Soprano may not be as easy as clicking a button 🐶🥃👨.
Think about it — it’s much easier to sell 1000 shares of AAPL than it is to sell 1000 acres of apple farms 🍎. Along the same lines, there are potentially longer holding or lock-up periods with these investments. Stocks and bonds trade almost daily. Alts, on the other hand, may not trade daily, or even weekly, or monthly for that matter. While many marketplaces are alleviating this disconnect, it can still be challenging to find a buyer when needed.
Remember when I said alts offer the potential for high returns and low risks? That’s not actually a generality…alts can have significantly more risk. Perhaps you have heard of the housing crisis of 2008? The above Pimco graph shows the targeted net returns of an asset by the relative expected risk. Where do NFTs and sports cards fit in this model? Beats us… and our novice Photoshop skills didn’t allow us to speculate.
This still makes no cents 👛
I was going to go with an “art appreciation 📈” pun, but decided for a classic. Still confused? Let some folks (allegedly) smarter than us help you out:
Any interesting asset classes we may have missed? Lets us know!