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

When it comes to diversifying your investment portfolio, incorporating alternative investments can offer a unique way to spread risk and potentially increase returns. Alternative investments, such as real estate, commodities, private equity, and hedge funds, often behave differently from traditional stocks and bonds, providing a way to hedge against market volatility and economic downturns. The amount you should diversify into alternative investments depends on your risk tolerance, investment goals, and time horizon.

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 are also a great way to build wealth and passive income. This is especially true when it comes to real estate, which is perhaps the most traditional alternative investment. Many investors have created generational wealth for themselves through real estate ownership.

Many investors have gotten wealthy through other alternative investments. Venture capital and private equity can be incredibly lucrative. The same holds true for well-placed bets on commodities futures.

Most recently, cryptocurrency has moved to the forefront of people’s thoughts when it comes to alternative investments. The rise and fall of cryptocurrencies like Bitcoin and Dogecoin has captivated the news, and many crypto investors have made a lot of money.

Aside from the upside, the single biggest reason you should consider alternative investments is that many of them do not perform in lockstep with the stock market. For example, the price of real estate, gold or oil may fluctuate, but the value of these assets will not necessarily crater along with stocks in a bear market. While you buy different stocks to have a diverse portfolio, you can make your portfolio even more diverse when you include alternative investments.

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 diversity 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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