Should You Use Alternative Investments To Increase Your Portfolio's Diversity And Resilience?

2020 was a year notable for a series of disruptive economic events, dramatic shifts in the way Americans work, and renewed interest in alternative markets, especially those embracing change to maintain relevance. The year began smoothly enough as many asset classes and indices experienced growth from the beginning of the year until around the middle of February. However, once the reality of the COVID-19 pandemic hit the markets, many of them screeched to a dramatic halt.

Unemployment hit record highs, while the bull market, which had previously seemed untouchable, ended. In the blink of an eye, American went from experiencing amazingly low unemployment and a turbocharged GDP to a new financial reality that tested our flexibility, resilience, and patience to the limits.

Markets hate uncertainty, but uncertainty is precisely what the pandemic brought us…in spades. This uncertainty, along with continued low interest rates and high volatility, fueled an unprecedented thirst for alternative investment strategies.

"Alternative" doesn't mean you have to buy snake oil.

Many people turn to alternative investments because they want to avoid online discount brokerages or traditional brokers with high fees. Often these investors like the idea of not being pressured into choosing particular investments like mutual funds, stocks, or ETFs simply because the broker makes a commission on these items. Alternative investments are also attractive to some because they can provide higher-than-average returns or significant tax advantages. However, alternative places for your cash can be risky. Slick marketing pieces and even slicker salespeople can make buying swampland in the Mojave sound like a great idea.

If you're thinking of adding alternative investments to your portfolio, you must do your due diligence and avoid scams and get-rich-quick offerings. In my opinion, it's never a good idea to invest a penny of your money until you have consulted with your financial advisor or CPA first. Snake oil aside, several legitimate types of alternative investments that you may want to consider in 2021.

Look into peer-to-peer (P2P) lending. P2P is a relatively new alternative investment option.

P2P lenders offer loans to small businesses or for personal use. In a P2P investment, you join a pool of other investors willing to loan money. When a borrower qualifies, you can then fund the loan. P2P eliminates the need for banks as a middleman. Lenders receive a fixed payment each month that includes the highest interest owed. Returns from P2P lending are often higher than those of standard vehicles. The most obvious risk from P2P lending is that there is an increased likelihood of defaults. Defaults occur primarily because P2P borrowers are typically people who are unable to get traditional bank loans.

Real estate. Real estate investment is consistently one of the most popular ways for people to create passive income. Beyond the traditional "fix and flip" or single-family rentals, investors can also take advantage of passive vehicles such as real estate syndications and REITs. Passive investing rids you of many of the more annoying and frustrating aspects of real estate investing, such as tenant issues, rent collection, and maintenance.

Precious metals. This sought-after asset class offers healthy competition to stocks, especially when times are unpredictable and the market is volatile. Precious metals, including titanium, gold, silver, and platinum, are widely respected as tangible hedges against inflation. Precious metals are also sometimes touted as better stores of value than fiat currency due to their low correlation with other asset classes. As is the case with real estate, there are various methods for investing in precious metals, such as mutual funds and self-directed IRAs. Investing in precious metals can be risky, however, especially for the inexperienced.

Crowdfunding. Many people aren't a good fit for owning a business. However, they may be ideal for owning part of someone else's business. Equity crowdfunding websites provide investors the chance to own a piece of other peoples' companies. Crowdfunding is particularly attractive to startups and smaller businesses needing capital. One positive aspect of crowdfunding is its low barrier to entry. You can often begin investing with less than $500. Owning part of a crowdfunded enterprise that is successful means you will reap the financial rewards. Conversely, if the company fails, you stand to lose all or part of your investment.

You should sit down with a qualified planner and consider a variety of strategies, including non-stock vehicles. Your planner will explain to you the pros, cons, and long-term consequences of each decision made. The bottom line is that your portfolio should be diversified and designed to fit your unique goals, risk tolerance, and overall financial philosophy.