Whether you’re a novice at investing or have been day-trading your own stocks for years, you’ve probably heard about alternative investments. You might even be curious about whether or not they’re worth buying. If you want to be a savvy investor, you need to learn about alternative investments.
Alternative investments are anything that doesn’t fall under the category of stocks or bonds, says Molly Stanifer, CFP, a financial adviser with Old Peak Finance. This includes anything from gold and real estate to curios and collectibles. Fun though it might be to start buying up real estate in the name of your portfolio, the question remains: is it worth it?
Stanifer walks us through three common alternative investments to explain a little bit more about whether or not you might want to buy them.
1. The Investment: Gold
The Rundown: A few years back it seemed like every red-blooded American was running out to buy gold, and Stanifer even saw this within her own realm of work. “In 2008–2009 when I was working at a retail brokerage company, I heard a lot of interest in gold,” she said. “A very small minority of clients were investing heavily in it—often indirectly with a fund that invested in futures contracts—but gold was certainly something people liked to talk about.”
Is It Worth It: Stanifer says she’s a big believer in diversification and owning everything in the broad market; however, your investment in any commodity, including gold, should never equal more than 3% of your portfolio. “If you choose to own more than 3%, you are communicating that you value gold higher than the broader market does,” she says. When it comes to gold, it’s ultimately best to think of it this way: gold is only a small fraction of precious metals, precious metals are a small fraction of commodities, commodities are a fraction of alternative investments, and alternative investments should be a small fraction (if any part at all) of a diversified portfolio.
2. The Investment: Real Estate
The Rundown: In the past few years, Stanifer has heard more and more buzz when it comes to purchasing real estate as part of a diversified portfolio. This attraction makes sense, given the explosion in popularity of house fixer-upper shows and how fun and quasi-easy they make the whole process appear.
Is It Worth It: If you’re thinking about using real estate as a way to diversify, you may want to think again. Stanifer says that most investors have enough exposure already if they own one home. “Most people that own a house will already have more real estate exposure than the broad global market,” she says. Keep in mind also that there are a lot of additional expenses that come with real estate, like repairs, maintenance, utilities, and taxes, all of which may decrease the overall value of your investment opportunity.
3. The Investment: Curios
The Rundown: Most collectibles will probably not react to price in the same way or at the same time as stocks and bonds, which adds diversification to a portfolio. “But accessibility and liquidity should also be considered,” Stanifer adds. “Stamps and other collectibles are not traded as often as stocks and bonds, and when things are traded more often, there is less variation in price. As far as accessibility goes, once a rare object is discovered, there could be additional costs to get it and store it.”
Is It Worth It: If you get enjoyment out of collecting things like stamps and coins, then the investment may be worth it to you. Keep in mind, however, that barriers and small market demand make collectibles an inappropriate investment staple, says Stanifer. In other words, if you like collecting for the hobby of it or if you expect to hand these items down to kids and grandkids, go for it—but you shouldn’t expect to get rich off your stamp collection.
Ultimately, your investments are your choice. But whatever you choose to back, make sure you’re investing in your future. Diversify your portfolio, use credit cards intelligently to build your credit and increase your buying power, and regularly check your credit report.