Best Alternative Investments: Beyond Stocks and Bonds

Introduction

When most people think about investing, they picture the traditional world of stocks and bonds. While these remain important building blocks of any portfolio, the investment landscape has expanded dramatically in recent years. Alternative investments now offer everyday investors opportunities that were once reserved for the wealthy or institutional investors.

Alternative investments can help you diversify your portfolio, potentially reduce risk, and access new sources of returns. They’re called “alternative” because they represent options beyond the traditional asset classes of stocks, bonds, and cash.

In this comprehensive guide, you’ll learn about the most accessible and practical alternative investments for beginners. We’ll cover what they are, how they work, and most importantly, how you can get started with as little as $100. You’ll also discover how to avoid common mistakes and build a well-rounded investment strategy that goes beyond the basics.

Whether you’re looking to diversify an existing portfolio or explore new investment opportunities, this guide will give you the knowledge and confidence to make informed decisions about alternative investments.

The Basics

What Are Alternative Investments?

Alternative investments are any investments outside of traditional stocks, bonds, and cash. They include real estate, commodities, private equity, hedge funds, collectibles, and newer options like peer-to-peer lending and cryptocurrency.

The key characteristics that make these investments “alternative” include:

• Lower correlation with stock market movements
• Different risk profiles than traditional investments
• Unique return drivers not tied to company earnings or interest rates
• Often less liquid than stocks and bonds

Core Concepts You Need to Know

Diversification: The practice of spreading investments across different types of assets to reduce risk. Alternative investments can provide diversification benefits because they often move independently of stock prices.

Correlation: A measure of how closely two investments move together. Low correlation means when stocks go down, your alternative investment might hold steady or even go up.

Liquidity: How quickly you can convert an investment into cash. Many alternative investments are less liquid than stocks, meaning you might need to hold them longer.

Minimum Investment: The smallest amount required to invest in a particular option. Thanks to technology, many alternatives now have much lower minimums than in the past.

How Alternative Investments Fit Into Your Portfolio

Financial advisors typically recommend that alternative investments make up 5-20% of your total portfolio, depending on your goals and risk tolerance. They shouldn’t replace your core holdings of stocks and bonds, but rather complement them.

Think of alternative investments as the seasoning in your investment recipe – a small amount can enhance the overall flavor and performance of your portfolio.

Step-by-Step Guide to Getting Started

Step 1: Assess Your Financial Foundation (Time: 1 hour)

Before exploring alternatives, ensure you have:

• An emergency fund covering 3-6 months of expenses
• High-interest debt under control
• A basic portfolio of diversified stocks and bonds
• Clear investment goals and timeline

Step 2: Research Your Options (Time: 3-5 hours)

Start with these beginner-friendly alternatives:

Real Estate Investment Trusts (REITs)

• What they are: Companies that own income-producing real estate
• Minimum investment: As low as the price of one share (often under $50)
• Tools needed: Standard brokerage account
• Best for: Steady income and real estate exposure without property management

Commodity ETFs

• What they are: Funds that track the price of gold, oil, agricultural products, or other raw materials
• Minimum investment: Price of one share (typically $25-100)
• Tools needed: Brokerage account
• Best for: Inflation protection and portfolio diversification

Peer-to-Peer Lending

• What it is: Lending money directly to individuals or businesses through online platforms
• Minimum investment: $25-1,000 depending on platform
• Tools needed: Account with P2P platform
• Best for: Higher yield potential than bonds

Step 3: Choose Your Platform (Time: 2-3 hours)

Research platforms based on:

• Fees and costs
• Minimum investments
• Available investment options
• User reviews and ratings
• Regulatory compliance

Popular platforms include:

• For REITs: Traditional brokerages like Fidelity, Schwab, or Vanguard
• For crowdfunded real estate: Fundrise, RealtyMogul
• For P2P lending: LendingClub, Prosper
• For commodities: Any major brokerage offering ETFs

Step 4: Start Small and Learn (Time: Ongoing)

Begin with just 2-5% of your portfolio in alternatives. This allows you to:

• Learn how these investments behave
• Understand the platforms and processes
• Minimize risk while gaining experience
• Build confidence before increasing allocation

Step 5: Monitor and Adjust (Time: 1 hour monthly)

Track your alternative investments alongside your traditional ones. Note:

• Performance compared to your expectations
• How they’re affected by market events
• Whether they’re providing the diversification benefits you sought
• Any changes in fees or platform policies

Common Questions Beginners Have

“Are alternative investments too risky for beginners?”
Not necessarily. While some alternatives like private equity or hedge funds carry high risks, others like REITs or commodity ETFs can actually be less risky than individual stocks. The key is choosing appropriate alternatives and keeping your allocation reasonable.

“Do I need a lot of money to start?”
No. Thanks to technology and new platforms, you can start with as little as $25-100 for many alternative investments. This is a dramatic change from the past when alternatives required investments of $100,000 or more.

“How do taxes work with alternative investments?”
Tax treatment varies by investment type. REITs often generate taxable income, P2P lending creates ordinary income, and some alternatives may produce capital gains. Consider holding tax-inefficient alternatives in tax-advantaged accounts like IRAs when possible.

“Are these investments regulated and safe?”
Regulation varies by investment type. REITs and commodity ETFs are heavily regulated like other publicly traded securities. Newer platforms like crowdfunded real estate have less regulation but are still subject to securities laws. Always verify that platforms are properly registered and regulated.

“How long should I hold alternative investments?”
This depends on the specific investment, but many alternatives are designed for longer holding periods. Real estate investments might be held for 5-10 years, while commodity positions might be shorter-term. Always understand the recommended holding period before investing.

Mistakes to Avoid

Mistake 1: Investing Too Much Too Soon

Many beginners get excited about alternatives and allocate too large a percentage of their portfolio. Start small (2-5%) and gradually increase as you gain experience and comfort.

Mistake 2: Neglecting Due Diligence

Alternative investments often involve less-familiar platforms and structures. Always research:

• Platform reputation and track record
• Fee structures (which can be higher than traditional investments)
• Liquidity terms and restrictions
• Historical performance data

Mistake 3: Chasing Hot Trends

Don’t invest in alternatives just because they’re trendy or generating media buzz. Focus on how they fit your overall investment strategy and risk tolerance.

Mistake 4: Ignoring Fees

Alternative investments often have higher fees than traditional index funds. A 2% annual fee might not sound like much, but it can significantly impact long-term returns. Always understand all costs involved.

Mistake 5: Expecting Immediate Results

Many alternatives are designed for longer holding periods and may not show immediate returns. Be patient and focus on their role in your overall portfolio strategy.

Mistake 6: Forgetting About Taxes

Some alternatives generate regular taxable income or have complex tax implications. Factor taxes into your expected returns and consider holding tax-inefficient investments in tax-advantaged accounts.

Getting Started Today

Your First Steps

1. Complete your financial foundation check (if you haven’t already)
2. Choose one alternative investment type to focus on initially
3. Research 2-3 platforms that offer this investment type
4. Start with a small amount you can afford to lose or tie up for several years

Minimum Requirements

• Financial: Emergency fund established, high-interest debt controlled
• Investment: $25-100 to start (varies by platform)
• Time: 5-10 hours for initial research and setup
• Knowledge: Understanding of basic investing principles

Recommended First Investments

For most beginners, these represent the best starting points:

1. REITs through a brokerage account: Highly liquid, well-regulated, easy to understand
2. Broad commodity ETFs: Simple exposure to hard assets, available through any broker
3. Crowdfunded real estate with small minimum: Provides real estate exposure with professional management

Essential Resources

• Morningstar.com: Research REITs and commodity funds
• SEC.gov: Verify platform registrations and read investor alerts
• Platform websites: Most provide educational resources about their specific investments
• Your brokerage’s research tools: Many offer screening tools for REITs and commodity funds

Next Steps: Advancing Your Alternative Investment Knowledge

Expanding Your Portfolio

Once comfortable with your first alternative investments:

1. Add a second type of alternative investment
2. Gradually increase allocation to 10-15% of portfolio if performance meets expectations
3. Consider more sophisticated options like individual REITs or sector-specific commodity funds

Advanced Alternative Investments

As your knowledge and comfort grow, you might explore:

• Individual rental properties (requires significant capital and time)
• Private equity (typically requires accredited investor status)
• Hedge funds (high minimums and fees)
• Collectibles (art, wine, classic cars)

Continuing Education

• Read annual reports from your REIT and fund investments
• Follow alternative investment news through financial publications
• Join online communities focused on alternative investing
• Consider courses on real estate or commodity investing

Related Topics to Explore

• Tax-loss harvesting with alternative investments
• International alternative investments for global diversification
• ESG (Environmental, Social, Governance) alternatives for values-based investing
• Alternative investment strategies during different market cycles

Frequently Asked Questions

Q: What’s the best alternative investment for complete beginners?
A: REITs purchased through a regular brokerage account are typically the best starting point. They’re liquid, well-regulated, easy to understand, and require minimal investment amounts.

Q: How much of my portfolio should be in alternative investments?
A: Most financial advisors recommend 5-20% for individual investors, with beginners starting at the lower end. Your specific allocation should depend on your goals, timeline, and risk tolerance.

Q: Are alternative investments more risky than stocks?
A: Risk varies by investment type. Some alternatives like REITs may be less risky than individual stocks, while others like P2P lending carry unique risks. The key is understanding the specific risks of each investment.

Q: Do I need special accounts for alternative investments?
A: Many alternatives can be held in regular brokerage accounts (REITs, commodity ETFs) or tax-advantaged accounts like IRAs. Some platforms require separate accounts, but these are typically easy to open online.

Q: How often should I check on my alternative investments?
A: Most alternatives are designed for longer holding periods, so monthly or quarterly reviews are usually sufficient. Avoid the temptation to check daily prices, especially for less liquid investments.

Q: Can I invest in alternatives through my 401(k)?
A: Most employer 401(k) plans offer limited alternative investment options, though some include REITs or commodity funds. You’ll likely have more options in an IRA or regular brokerage account.

Conclusion

Alternative investments represent an exciting opportunity to diversify beyond traditional stocks and bonds, potentially reducing risk while accessing new sources of returns. The key to success lies in starting small, learning as you go, and focusing on how these investments fit into your overall financial strategy.

Remember that alternatives should complement, not replace, a solid foundation of diversified stocks and bonds. Begin with simple, liquid options like REITs or commodity ETFs, and gradually expand your knowledge and allocation as you gain experience.

The investment landscape continues to evolve, with new opportunities regularly becoming available to individual investors. By understanding the basics covered in this guide, you’ll be well-positioned to evaluate and potentially benefit from these opportunities.

Most importantly, take action. Start with a small investment in one alternative that matches your comfort level and goals. The experience you gain will be invaluable as you continue building a more sophisticated and diversified investment portfolio.

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Disclaimer: This article is for educational purposes only and does not constitute financial advice. Always do your own research and consider consulting a licensed financial advisor before making investment decisions.