How Much of Your Portfolio Should You Diversify Into Alternative Investments?

Traditional investments like stocks and bonds have long been the foundation of most portfolios, but in today’s volatile market, investors are increasingly turning to alternative investments to enhance returns and reduce risk. Alternative investments include real estate, private equity, hedge funds, commodities, cryptocurrencies, and collectibles, offering opportunities beyond traditional asset classes.

Diversifying into alternative investments can provide higher potential returns, inflation protection, and portfolio stability, as these assets often have a low correlation with stock market fluctuations. However, they also come with unique risks, such as lower liquidity, higher fees, and complex valuation processes.

This guide explores the strategies for incorporating alternative investments into your portfolio to achieve long-term financial growth and resilience.

What is an Alternative Investment?

Investments are broken down into two separate categories. The first category is known as traditional investments. Historically, stocks, bonds, and cash are considered to be traditional investments. An alternative investment is considered anything besides that. Examples of alternative investments would include:

• Real estate
• Precious metals
• Cryptocurrency
• Collectibles
• Venture capital
• Private equity
• Hedge funds
• Commodities
• Wine
• Non-fungible tokens (NFTs)

Why Should You Have Alternative Investments?

Alternative investments offer unique advantages that can enhance your portfolio’s performance and resilience. Here’s why you should consider them:

1. Diversification and Risk Reduction: Alternative assets have a low correlation with traditional stocks and bonds, helping to stabilize your portfolio during market downturns.
2. Higher Return Potential: Many alternative investments, such as private equity and real estate, have the potential for higher long-term returns compared to traditional investments.
3. Inflation Protection: Assets like real estate, commodities, and gold tend to retain or increase in value during inflationary periods, preserving your purchasing power.
4. Income Generation: Real estate, private credit, and certain hedge fund strategies can provide consistent passive income streams.
5. Wealth Preservation: Hard assets like gold, fine art, and farmland maintain intrinsic value over time, making them a hedge against economic instability.

How Much of Your Portfolio Should You Diversify Into Alternative Investments?

This is a question that doesn’t have a single, set answer. If you’re talking about alternative investments to diversify your traditional investment portfolio, most investment advisors recommend that no more than 15% to 30% of your portfolio be devoted to alternative investments. This practice will leave enough alternative assets in your portfolio to profit off of them while not over-exposing you to a downturn in your chosen alternative investments.

Some people have built entire portfolios of alternative assets. If you have professional experience or specific knowledge of an alternative investing field, you may take an inverse approach and concentrate 70% to 85% of your portfolio on your preferred alternative investments. Then you would diversify the other 15% to 30% in traditional investments.

Which Alternative Investment is Right for You?

Picking which alternative investment is right for you is a personal choice. The alternative investments you feel most comfortable with will vary based on your risk tolerance, investment goals, and the amount of capital you have to invest. The good news is that you can access a wide variety of alternative offerings and new ways to participate in them.

Where Can You Find Alternative Investments?

If you’re thinking about real estate, you can start by looking for opportunities in your own area. However, if you live in an overheated real estate market with high prices, it may be too expensive to make a purchase. In this case, online real estate crowdfunding platforms like CrowdStreet and Arrived Homes, where you can buy equity in real estate investments at affordable prices, may work.

If the idea of venture capital or buying into startups excites you, you can use platforms like StartEngine, WeFunder, and Seed Invest. You can browse these platforms and find thousands of new startups in a variety of fields to invest in.

In the case of real estate and venture capital/startup funding, if you don’t feel comfortable picking investments yourself, you don’t have to. The world of alternative investing features numerous real estate investment trusts (REITs) and even venture capital funds you can buy into. In those types of offerings, you invest the capital and the fund manager grows your wealth.

Benzinga's Favorite Alternative Investment Platforms

It’s Never too Late to Join the Alternative Investment Party

If you’ve been sitting on the sidelines waiting for an opportunity to get into alternative investments, there has never been a better time to get into the game. The rise of online investing platforms has created a diverse marketplace of investment offerings in almost every alternative investment sector. The only thing left for you to do is figure out what you want to get into and how you’re going to do it.

Remember, even though you’re making alternative investments, the fundamentals of investing still remain the same. You always face the risk of loss, which means you need to conduct due diligence and make sure you are as familiar with the downsides as the upsides of your chosen investment. If you do that, you’ll be well on your way to adding quality alternative investments to your traditional investment portfolio.

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