I've always been super interested in "alternative investments". Alternative investments are less conventional asset classes, such as real estate, private equity, and venture capital. These investments can add diversification to a portfolio, as long as they remain relatively uncorrelated with other assets (you can learn more about why this matters here).
Typically, alternative investments tend to be more regulated, and are often limited to accredited investors. Today, however, there are a number of emerging alternative investments available to the retail investor. There are two forces at work here. 1) The barriers to entry for traditional alternative asset classes are lowering. 2) New marketplaces are emerging for digital assets like cryptocurrency and web properties.
Adding Alternatives to Your Portfolio
I recently signed up for a Personal Capital account, which gave me a glimpse into the diversification of my investment portfolio. I learned that I'm already highly skewed towards alternatives, as a good chunk of my money is in illiquid private stock that I've received from working at technology companies. Nevertheless, I'm eager to explore other alternative investment opportunities. Personal Capital recommends putting 3 - 7% of one's assets in alternatives. Of course, this percentage depends on a number of factors, including how close you are to retirement.
Here are four alternative investments I've been learning more about and dabbling around in. I would almost classify these as "ultra-alternative", as they're even newer than a lot of the asset classes that are traditionally considered alternative.
Word of caution: I wouldn't put any money in any of these asset classes unless you're comfortable with the possibility that you might lose it completely! These sit on the highest end of the risk spectrum.
If you haven't heard of cryptocurrency, it's definitely something to investigate, if not just because it's fascinating from an academic perspective. Cryptocurrency provides a mechanism by which people can exchange currency without a third-party intermediary, such as a bank.
Because cryptocurrency is currency, it can be exchanged for other currencies (such as US dollars). This means you can speculate on its price. As an example, I bought a couple Bitcoin 4 years ago when its price was in the $50 range. Now the price of a Bitcoin is around $2,700. Not a bad return!
An analysis on Coindesk shows that Bitcoin's price has remained relatively independent of other swings in asset values. This means that it could potentially be an interesting addition to your portfolio. We likely don't have enough data on emerging cryptocurrencies like Ethereum, but if you have an even higher appetite for risk
My philosophy here has been to invest a very small amount of my portfolio in a few emerging cryptocurrencies. I'm no expert (which is why I don't invest more), but I do know that if Bitcoin does become a widely-adopted currency, the price of a single Bitcoin would rise to very high levels, because the supply of Bitcoins steadies off over time. Given those dynamics, it seems to make sense to allocate a small portion of my portfolio there.back to menu ↑
It turns out there is an emerging market for buying and selling websites. The basic idea is that you can purchase a website that is already earning monthly income through advertising, affiliate sales, e-commerce, or some other revenue stream. You could then hold on to this website and reap the monthly income, or you could attempt to improve it and increase its revenue stream. Assuming the market for websites remains strong, you could then sell your website—hopefully for a higher price.
Flippa and Empire Flippers are two marketplaces that allow people to buy and sell websites. Flippa's approach has been breadth: auctions are public, and anyone can post their website. Their offerings tend to be slightly cheaper, ranging from below $100 to the $100,000 range. Empire Flippers, on the other hand, has a team dedicated to vetting each website on their platform by hand. Their offerings start in the $20,000 range all the way up to seven figures.
This investment is certainly one that comes with a learning curve. You can think of investing in websites as similar to purchasing a house, but enormously riskier. If you invest in a house, it could depreciate in value if its not well-maintained. Similarly, if the digital ecosystem changes, your website could lose traffic (and thus revenue) entirely. One day Google changes its algorithms and your website is no longer showing up in search results. Again, super high risk.
I recently bought my first website on Flippa for a little under $2,000, simply as a fun learning experience. The site has a meager revenue stream of around ~$50 / month. I probably overpaid for the asset, but I'm early enough that I think the learning experience will be worth it. This investment also requires a high degree of specialized knowledge in digital marketing.back to menu ↑
Similar to websites, the market for apps is also emerging on both Flippa and Empire Flippers. What's interesting here is that (for the time being) maintaining and updating an app requires more technical expertise than most people have. This may make the barriers to entry for the app market somewhat higher than those for the market for websites. Because I coded up a few iOS apps in a past life, I know my way around the technical side. I'm pretty interested in getting into this market.back to menu ↑
Startup equity is another emerging asset. Recently, changes in the JOBS Act have opened up startup investing to non-accredited investors—so-called "equity crowdfunding". I recently signed up for SeedInvest, which allows you to buy shares of equity in early stage startups.
To be honest, I'm not too bullish on this market at the moment. For one, the marketplace is immature enough that it's hard to weed out scammers—people who can pitch themselves effectively in order to quickly raise cash but are unlikely to actually succeed with their venture. Having a personal, offline connection with a founder (as is typically the case in traditional venture or angel investing) is far different from browsing a startup profile on a platform like SeedInvest.
These investments are exciting and fun, but be careful! Many of them are time intensive, require specialized knowledge, or are incredibly high risk. Again, I'd recommend sectioning off only a small portion of your portfolio for alternatives.