3 Alternative Investments That Provide Excellent Diversification

With the current shaky global economic environment and the uncertainty stemming from geopolitical issues, such as the ‘Brexit’ in the UK, presidential elections in the US and global terrorism, it is wise to consider putting a part of your portfolio into asset classes that have little to no correlation with stock and bonds to avoid steep losses in the case of a market correction.

In this article, you will be introduced to three alternative investments that provide excellent diversification for your investment portfolio.

Angel investing

Angel investing refers to investing in new start-up companies as a private investor. Angel investing was previously only an option for well-connected high net worth individuals. Now, however, retail investors can invest in start-ups and SMEs through the use of online equity crowdfunding platforms, even with a small amount of capital.

The way angel investing using online crowdfunding platforms works is that you choose start-ups, which you believe have good potential to grow and succeed. Then, once they have managed to raise enough capital from angel investors and their funding round was a success, you will be awarded your shares in their businesses. To monetize your angel investment the start-up either has to ‘go public’ (i.e. list on the stock exchange) or get acquired by a larger company, at which point you could sell your shares for a big profit. Angel investments carry a very high risk but can also generate a very high profit.

MortonFinance Analyst Joshua Foster stated, “Investing in start-ups has become increasingly popular among retail investors who are looking to find the next Facebook, SnapChat or Twitter. It is a great way to diversify one’s overall investment portfolio but one should only place a small amount of capital in start-up investments as they are very risky investments, due to the fact that most start-ups fail within the first five years. It is best to diversify your start-up investments by investing small amounts in a range of promising start-ups as opposed to putting all your prescribed capital into just one.”

Peer-to-peer lending

Peer-to-peer lending refers to a method through which individuals and small businesses can borrow money from a group of individual investors without the use of a traditional financial intermediary. Peer-to-peer lending became popular after the 2008 financial crisis when banks reduced lending to small and medium-sized businesses, and peer-to-peer lenders were able to step into that void and provide much-needed financing for SMEs.

Investors in peer-to-peer loans, on the other hand, can benefit from high fixed interest returns on their investments. Given the low returns on traditional fixed income securities, such as government and corporate bonds, peer-to-peer loans offer higher yields and are therefore becoming increasingly attractive to investors. Furthermore, they offer excellent diversification due to their low correlation with the performance of the stock and bond market.

Popular peer-to-peer lending platforms in the United States include Lending Club, Funding Circle and Prosper.

Investing in collectibles

Collectibles, as an investment asset class, refer to assets such as art, antiques, fine wine, vintage cars, baseball cards, Pokémon cards, comic books, Star Wars figures, stamps, etc. Anything you can collect that increases in value over time would fall into this category. If you are an expert in a particular field that falls under collectibles you can start collecting as a form of alternative investment. However, if you are not an expert you can always seek expert advice on the subject matter to ensure you aren’t overpaying for collectible items when you decide to make investments. Lego, for example, has been a better investment than gold since 2000.

The main benefit of this asset class is that it has zero correlation to traditional securities, such as stock and bonds, and therefore offers excellent diversification for your investment portfolio. Furthermore, you can generate strong average annual returns if you hold the right collectibles in your portfolio.